Hollande’s plan to tackle soaring French unemployment by swelling the size of the public service is anathema to the thrifty chancellor, who is keen to see eurozone governments cut their spending. […] But even more worrying for Merkel is Hollande’s pledge to renegotiate her precious, prized treaty that will force all eurozone countries to follow a rigid budgetary discipline.
Karen Maley, Business Spectator
It’s an election year for France, and that’s proving to be bad news for Germany’s chancellor Angela Merkel. Her current counterpart in the Élysée Palace, Nicolas Sarkozy, is largely in lock-step with the Germans. But Sarkozy is facing an uphill battle for re-election. He will likely be succeeded later this year by the socialist candidate, François Hollande. And Hollande is far less receptive than Sarkozy to the German push to reform Europe.
Of particular concern, as Karen Maley notes, is that Hollande will seek to renegotiate a new Eurozone fiscal pact — agreed only last month — that would, among other things, bind governments in the single currency union to budget deficit caps. Hollande wants to water down the treaty, which would essentially render it useless in promoting the kind of fiscal restraint that Berlin is seeking.
Unsurprisingly then, Merkel is hoping for a Sarkozy win. Indeed, she is effectively campaigning for her man in Paris. But with Hollande in such a commanding position in the polls, the risk is that Merkel will simply end up poisoning the future Franco-German relationship.
While there is a recognition that it is important for Greek politicians to be seen by voters to be putting up a fight, there is a growing fear that all the political grandstanding could backfire, and plunge the country into bankruptcy.
Karen Maley, Business Spectator
The job of Greece’s prime minister, Lucas Papademos, is not a fun one. As a technocratic appointment, he has no political backing. Hence, passage of legislation requires the parties represented in the Greek parliament to agree with his proposals. Of course, if they were political winners, they’d probably fly through. But there is nothing palatable about the measures being imposed on Greece is exchange for ongoing financial assistance.
The current sticking point is enforcing cuts to wages — a strategy of internal devaluation to boost Greece’s competitiveness. Antonis Samaras, leader of the centre-right New Democracy party, has complained that the country’s creditors are ‘asking for more recession than the country can take’. If the leaders fail to agree, then there is a real prospect that further bailouts will be halted. That would almost certainly prompt a total Greek default by March.
The problem, as Business Spectator’s Karen Maley reports, is that Greece has consistently over-promised and under-delivered since it was first sucked into the current debt crisis. Greece has frequently failed to meet agreed deadlines, and targets for a variety of measures have slipped away. Even if the latest impasse is resolved, there will surely be another one soon enough. How long before the inevitable strikes, and Greece is rendered broke by its squabbling politicians?
Berlin is as much a problem as Athens. The two countries are two sides of the same euro coin.
Oliver Marc Hartwich, Centre for Independent Studies
There has been much commentary about why German chancellor Angela Merkel is wrong in her dogged determination to impose austerity measures across Europe. And Oliver Marc Hartwich has another column in Business Spectator today expressing much the same sentiment. Seemingly nothing new to see here.
However, there is new insight in Hartwich’s article, as he examines why Germany seems so incapable of listening to the widely available analysis. And perversely, it’s because it might be in their interests to keep the likes of Greece and others in Europe’s ‘periphery’ dependent on Germany. The alternative is to allow the rest of Europe to become more competitive, thereby bolstering their own economies. That sounds good, but from the German perspective, it weakens their relative advantage. Of course, the collapse of the Eurozone would be no picnic either — so the Germans want to avoid that outcome too. But there is a difference between averting armageddon and promoting prosperity. While there is a gulf between the two linguistically, the distinction in policy terms amounts to a very fine line. Europe’s future depends on how well Merkel sticks on her chosen side of that line.
For a European future, just add German consumers
Europe’s leaders might be relieved that the European Central Bank has stepped in to try and fix up the mess that national governments have created. Refinancing operations launched by the ECB in December have successfully reduced the interest rates owed on the debts of some embattled governments relative to the mighty German bund. But just because the arteries of Europe’s financial system are no longer quite as clogged does not mean that the patient has been healed. Make no mistake, Europe still faces a massive crisis.
Despite some evidence that policymakers recognise the need for pro-growth measures (such as structural reforms), Europe’s recovery prospects are being hamstrung by an ill-targeted focus on austerity. Yes, massive budget deficits need to be pared back over time. As Martin Wolf writes, key to this story are the economic imbalances within the Eurozone. Germany is warranted in resisting efforts to convert the Eurozone into some kind of transfer union, where prudent Germans are forever left to backstop profligacy elsewhere. But as if to make an example of the merits of austerity, Germany too is cutting its relatively modest budget deficit, when there is absolutely no need for it to do so. In fact, its consumers should be spending more — not less — to help boost intra-European trade. German belt-tightening is entirely counterproductive, and prevents the necessary rebalancing between the competitive (Germany, the Netherlands) and the uncompetitive (Spain, Italy).
Citing arguments by Christine Lagarde, the head of the International Monetary Fund, Wolf contends that Europe’s austerity drive should not be an across-the-board proposition. Rather, the adjustment process must be facilitated by a selective approach to fiscal policy. If the German government doesn’t want to hand over bucketloads of money to other European governments, then cutting spending at home is the opposite of what is needed. Instead, it should give more money (in one way or another) to its own people so that they can in turn spend it on goods and services, many of which will come from elsewhere in the region. A bubbly German economy is necessary to boost optimism in the Eurozone, and help lift its debt-ridden neighbours out of their malaise.
Maybe second only to Greece, Spain is Europe’s most notorious instance of a broken labour market. In Spain, as in many other failing EU countries, “structural reform” means “labour-market reform” — and “labour-market reform” is a euphemism for confronting the unions.
Clive Crook, Bloomberg View
Virtually anywhere in the world industrial relations is a contentious issue. Employees want long-term certainty about employment and wages so that they can confidently plan and live their lives. Employers seek flexibility in how they use their workforce so that they can respond to changing business and economic conditions. Some countries do relatively well in achieving a balance. In other places, the system is woefully lopsided.
Take Spain as a contemporary example. As Clive Crook writes, its two-tiered system of ‘permanent’ and ‘temporary’ employees was a piecemeal measure designed to give wiggle room to companies. But bargaining arrangements are collective across industries and provinces — not specific to individual firms. Permanent workers, enjoying a high range of privileges, are virtually unsackable. Temporary workers, by contrast, are dropped at the first sign of trouble. Unsurprisingly then, in the midst of an economic crisis, unemployment is surging in Spain — it now exceeds 22 per cent. Most of those on the dole queue were temporary workers, who are generally younger workers too (having entered the system after labour reforms) Why would an employer choose to lock in a young worker on a permanent contract when they have potentially decades of employment ahead of them, with all the obligations attached to that? Meanwhile, companies are unable to change the legally-enforceable benefits of the permanent workforce. So, employment falls off a cliff, but wages barely budge. There are a range of other perverse effects, as Crook notes, but the fundamental problem is that inflexibility means that employers ultimately face far higher costs than many of their foreign competitors. Collectively, this limits Spain’s economic growth prospects, which also impairs its ability to respond to the debt crisis it now faces.
Hence, labour market reforms are being advocated as an important step to unlocking growth potential in Spain (as well as Greece and other sclerotic European economies). Crook notes that the battles the Spanish government now faces have been fought and won their counterparts elsewhere throughout the world. Spain has previously squibbed on serious reform, and will again face heavy union resistance to change. But as Crook also argues, the current crisis — and Spain’s unemployment rate, which dwarfs comparable statistic in other Eurozone members — also highlights just how dysfunctional the current system. This isn’t a battle between employers and employees. It’s about the fundamental inequity between (permanent) workers and the unemployed.
