Internal Devaluation Is the Least Social Democratic Policy

David LizoainThe argument in favour of internal devaluation is deceptively simple. First, you are shown a graph comparing unit labour costs (ULCs) in Germany to unit labour costs on the European periphery. A “competitiveness gap” has opened up over the past decade between the North and the South. Once upon a time, you could devalue the drachma, the peseta, or even the franc in an attempt to regain competitiveness. Now everyone is in the Euro. Therefore, if you want to regain competitiveness, you must embark on an “internal devaluation” in order to lower wages and prices. This you will achieve by carrying out “structural reforms”. One thing leads to another, and before you know it you are prescribing a heavy dose of deflation for depressed economies.

Over the past few decades, we have witnessed a very clear strategy aimed at weakening the power of labour in general and organized labour in specific. This process has only been accelerated by the crisis. Internal devaluation is a terrible policy, but behind the euphemisms lie a heavy dose of ideology.

Unit labour costs can be decomposed into the price level multiplied by labour’s share of output. [i] Under the guise of bringing ULCs into line, what is now actually being argued is that the labour shares of national income should be reduced on the European periphery. It is hard to be more explicit: less for L, more for K. It is also harder to envision a policy that is less social democratic. To argue that the way out of the crisis is for workers to sacrifice for the benefit of the holders of capital is a total intellectual capitulation.

In the current context, I think it would be interesting to revisit the Meidner Plan for a system of wage earner funds. In Meidner’s own words this plan would “skim the excess profits and transfer them from the capital owners into the collective ownership of the employees… The union proposal for wage-earner funds has rightly been considered as a union attempt to share the fruits of capital accumulation with the capital owners.” If there is going to be wage restraint, workers should be getting something in return.

More generally, a clear social democratic agenda for strengthening the power of organized labour across Europe seems to be lacking. Also lacking is a clear a legislative program designed to organize the growing number of underprotected and precarious labour market outsiders.  At some point, the spiral of defeat after defeat has to be brought to an end. But it’s the defeats of the imagination that are the worst, because they frustrate the birth of an alternative.

[i] For a much more thorough treatment of ULCs, Jesus Felipe and Utsav Kumar argued at that “the recent debate about the need to reduce unit labour costs in the peripheral countries of the Eurozone is misguided.” They highlight both the defects of using ULCs and the need to study the export baskets of different countries. Their full piece is worth a look. So is Steve Waldman’s “Competitiveness is about capital much more than labor“.

  • Paul Sweeney

    It is worth pointing out that the strategy of Internal Devaluation which was attempted in Ireland in the wake of the Crash of 2008 has failed. The last government decided to cut the Minimum Wage by 12%; to cut public service wages, as they claimed (as did too many economists who should have known better) that private sector wages would soon fall; and to cut welfare.
    That Government was thrown out with ignominy. The new Government reversed the cut in the Minimum Wage, promised not to cut welfare rates (which they have adhered to, though they have made some cuts); have a public service reform agreement which is delivering for Ireland; and in the private sector wages have NOT fallen, when inflation (some deflation) is taken into account. About 24% of private sector workers have had pay increases, though about one fifth have had some pay reductions.
    Overall, hourly pay is holding up. This means when (if ever!) the recovery comes, workers in employment will see weekly earnings recover quickly. If sustained we may even get employment.
    However, growth in Irish employment ultimately depends on a) a EU deal on our socialised private Promissory Notes; b) an EU deal on Ireland’s socialised private bank debts and c) an EU stimulus programme (if ever!).