A central—and largely ignored—aspect of future federal Euro governance will be a Euro Area (EA) wages and productivity policy. Only such a policy, backed by European trade unions, can avoid trade imbalances spilling into national sovereign debt crises.
At the heart of the Euro Area (EA) crisis is the problem of trade imbalance. Just as China has accumulated an enormous current account surplus with the USA, so Germany has with the rest-of-the-word in general and the periphery of the EA (or Club Med) in particular. The mechanism is simple. German trade surpluses have been recycled (by definition) to capital account outflows, and such outflows have helped finance rising wages in the EA. Where wages rose faster than productivity in the periphery, current account deficits occurred, in some cases (but not all) mirrored by fiscal deficits. Since deficit countries could not devalue, currency crises have been replaced by sovereign debt crises.
Germany was always richer than its peripheral neighbours. In the late 1980s, the euro-deal provided a win-win situation: German exports would boom as a result of a strong but non-appreciating euro while the EA’s periphery would share in Europe’s prosperity through rising wages. And so it proved. After 1999, German real wage growth remained the lowest in the EA while its current account went from a small deficit to the second largest surplus in the world.[1]
The tendency towards wage-repression that started in the mid-1990s was aided by the fact that other European trading partners used the D-mark as an anchor to facilitate their smooth entry into the euro. It was this that prevented the domestic currency appreciation warranted by the deceleration of unit labour costs in the main surplus country, Germany, prior to the introduction of the euro. Indeed, the inauguration of the euro institutionalised Germany’s advantage and created the seeds of an explosive situation: diverging trading performances between Germany and other EA partners, with diverging tendencies to real depreciation in the former and real appreciation in the latter.[2]To many observers, an easy remedy would have been adopting a similar pace of wage disinflation throughout the EA. This is the main motive behind calls for ‘labour market flexibility’ and ‘budgetary austerity’ that have dominated policy discourse in the EA in the years prior to the current crisis. But if it is difficult to overlook the socio-economic consequences of wages lagging well behind labour to productivity in a single country, it seems even more incongruous to ignore the fact that wage repression for the entire region imparts a recessionary bias to all.
In the absence of nominal exchange rate adjustment at national level, trade imbalances cannot be solved by means of ‘internal devaluation’; ie, wage repression at the periphery. Just as the China-US trade imbalance is best resolved by increasing aggregate demand in China and supporting development strategies elsewhere rather than by means of expenditure contraction in the US (the cost of which would be further recession), EA trade imbalances cannot be resolved by inducing recession. Nor can it be argued that all current account deficits within the EU could be offset by running surpluses with the rest of the world. Such a situation would result in a real appreciation of the euro, thus eventually choking off the surpluses. Moreover, as Whyte (2010) has shown, the EA is simply too big for the rest of the world to be in deficit with all its members.[3]
Policy action is necessary if these trade imbalances are gradually to disappear. Crucially, labour productivity must increase faster in the deficit countries than in the surplus countries, an aim difficult to achieve unless proactive fiscal policy and infrastructure investment trigger a modernising wave of ‘crowding in’ private investment. This means that Europe must redistribute investment resources from rich to poor regions, a goal strongly emphasised in the 1983 DelorsWhite Paper.[4]
In addition, if higher labour productivity growth is to be achieved in the periphery, a ‘common wages policy’ (not to be confused with a common wage) must be adopted which better aligns wage and productivity growth and sustains aggregate demand. This will not be achieved with wage disparities exercising a deflationary impact on the union. In the absence of national exchange rate realignment, adjustment must take place through a regional wage bargaining process.
In short, a necessary (but not sufficient) condition for future EA prosperity is precisely the formation of a ‘transfer union’, but one that redistributes investment rather than consumption and matches wage gains to productivity growth. In building the institutional strcture underlying this process, it is clear that EA trade unions will need to play a far more central role than has been granted them to date.
[1] See ‘Save Europe’s Unity Now’, Financial Times, Editorial 9 Oct 2011
[2] See Irvin & Izurieta, http://epw.in/uploads/articles/16386.pdf
[3] See Whyte, P (2010) ‘Why Germany Is Not a Model for the Eurozone’, London: Centre for European Reform. Also see Marin, D., (2010) Germany’s super competitiveness: A helping hand from Eastern Europe. VoxEU.org. http://www.voxeu.org/index.php?q=node/5212
[4] See European Commission (1993b) ‘Growth Competitiveness and Employment’ (Delors White Paper). Luxembourg
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New column: "Solving Euro Area Trade Imbalances" by George Irvin http://t.co/v44cKe0K