What Does A Social Europe Look Like Today?

Jean-Paul Fitoussi

Jean-Paul Fitoussi

The crisis that began in 2008 is still ongoing. It is therefore tempting to consider that something that has now lasted for five years is no longer a crisis, but rather a new world that has taken hold. The rise in unemployment, which since 2008 has increased by more than 8 million in the Eurozone alone, and the increase in long-term unemployment, affecting almost 10% of the active population in Spain for example demonstrates, if that was necessary, that the Eurozone economy is sinking into recession.

In 2012, there was a new turning point in the crisis. In the countries of southern Europe, where the recession has hit hardest, a movement towards salary reduction began. The decrease in average salaries reached more than 7% in Spain, something that has never been seen in modern times in a developed country. This reduction was in part deliberate, given that the pay of civil servants was reduced, but it was mainly the high level of unemployment that led to this decrease in remuneration. This means that employees who still have a job fear that they might lose it and thus are forced to accept a reduction in pay. Unemployment is not limited to those who have lost their jobs or people newly arriving on the labour market, but in this recession it also affects those who thought that they would escape unemployment because of their status.

Xavier Timbeau

Xavier Timbeau

This decrease in salaries leads to an improvement of the current account balance. Combined with a drop in demand, the recovery of the external accounts has been spectacular in the southern countries. Spain, which had registered a record current account deficit of more than 7% of GDP was in balance by the end of 2012. Thus, one could see in this the necessary adjustment of a situation that was totally unsustainable. The brutality of the correction, it seems, was the direct result of the totally casual manner in which the problem had been considered beforehand.

Given all the circumstances, this view is not acceptable. And it is precisely here where a Social Europe should play its part. It depends on the way in which we reduce the series of macroeconomic disequilibria and encourage a different pathway from that of recession and unemployment whether we will be able to emerge from this crisis with less inequality, less poverty and less injustice. A Social Europe cannot be reduced to a mere project of macroeconomic equilibrium.

The first argument is that, at the end of the day, a reduction of wages resolves nothing. Sandwiched between the southern countries whose competitiveness is increasing very rapidly and northern Europe, which has an excellent and resilient  production system, France and Italy are today the only countries in the Eurozone to show a current account deficit. The path to higher productivity demands long-term investment but now Italy and France are going to adopt the policy of wage reduction. The case of Germany, looking at the labour market reforms of the 2000s, indicates what will happen: for those sectors outside traditional industry, that contribute to the costs of industry and thus to German competitiveness, the pressure is on for reducing wages.

There are three major consequences of this. The first one is that macroeconomic re-balancing is built on the quicksand of the zeal with which wage reduction is being implemented. This is an old argument, used countless times in the past, for example, when Laval introduced deflation or the policies introduced by Schacht and Brüning in Germany. Wage reduction does not produce adjustment of relative competitiveness, wage reduction only produces deflation.

The second consequence is macroeconomic. Wage reduction affects households that are indebted and whose real debt (or to be more exact, the debt related to income) increases in line with the prolongation of deflation. After five years of crisis, an increase in real debt at best means prolonging the recession. More than likely, it will be deepened through new defaults on private debt, building up the pressure in the banking system, and, finally, a collectivisation of these private debts. But in Spain and in other southern countries, more public debt means being one step closer to public default and thus the break-up of the Eurozone.

The third consequence encompasses the whole scenario. Deflation is not the solution to macroeconomic disequilibrium but it is the process through which inequalities will explode. The German lesson is exemplary for seeing that the decrease in unemployment since 2000 corresponds point by point with an increase in the poverty rate. This is what deflation has in store for the entire Eurozone. This is also what will make it unbearable socially and politically as was the case in Europe in the 1930s.

In order to get out of this spiral, we need a Social Europe. A new proposal for a Social Europe must be associated with a rapid exit from the recession and a decrease in unemployment. The essential elements of this are the pace of budgetary adjustment and monetary policy. Yet there is another element that could also be put on the table: a minimum wage for Europe, with national variations, that respects the collective bargaining practices dear to different countries. A minimum wage would be a relevant rampart against deflation (it should be noted that the minimum wage has been reduced in Greece). Such a minimum wage would be different in each country. The relative levels would express the differences in productivity and progress of each country. They would thus follow the increases in productivity by adding the inflation target of the European Central Bank.

This would fix the anticipated inflation and limit the devastating effect of unemployment on inequality. It would also ensure a more stable distribution of added value between employees and shareholders. And by expressing the surplus or deficit in the current account in terms of the relative levels of the minimum wage, such a device could be a powerful corrective for macroeconomic disequilibrium. In Germany today, it would lead to a more dynamic increase, all other things being equal, of the minimum wage than in France or Italy. The dynamic of  inequality would only be partially solved by this mechanism as high incomes are escaping control and intermediate incomes are running the risk of lower incomes catching up with them. And yet this is something that would make Europe more stable because it would be more social and more just.

This article is part of the EU Social Dimension expert sourcing project jointly organised by SEJ, the ETUCIG Metall, the Hans Böckler Stiftung, the Friedrich-Ebert-Stiftung and Lasaire.

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  • http://lib.ugent.be/bibliografie/801000072304 Frank Roels

    I can agree with this line of reasoning. However, we should try to understand why the financial sector, most employers, the EC, the German central bankers, the OECD, and their army of experts, think otherwise. They all want lower labour costs; they are followed by most political parties (in Belgium). I propose a short explanation, based upon reading and hearing their arguments. Fitoussl and Timbeau write: “a reduction of wages resolves nothing”. Well, actually it does: it increases net profit of corporations, even in the presence of reduced output and reduced consumer confidence. Lay-offs are an other way, and both mechanisms are combined these days. The success is visible when one looks at the corporate net profit: barely a crisis there. Can this go on indefinitely? Of course not; nothing does. But CEO’s don’t last long either, and they all have voluminous resignation and retirement packages.