Trichet V Democracy
A month late, I learn from brilliant economist Simon Wren-Lewis about the 3.5 year late revelation of the utter contempt that then European Central Bank President Jean-Claude Trichet had for Democracy.
I hand the microphone over to brilliant economist Paul DeGrauwe
The ECB’s letter to the Spanish government is not the only one the ECB sent to Member States’ governments. A similar letter was sent to the Italian Government. The letter is of great significance because it reflects the ambition of the central bank to determine macroeconomic policies in the Eurozone. This ambition should be checked, for two reasons.
First, the letter illustrates the intensity of the micro-economic management the ECB intends to apply in crisis countries. The letter contains a detailed list of what according to the ECB needs to be done in the labor market. Thus, collective agreements should be abolished and should be organized at the level of the individual firms. In addition, these agreements should not contain indexation clauses, even when these are entered into freely.
I am shocked and shocked that I am shocked. I should have known that Democracy is optional. Needless to say, third world countries are used to having policy dictated by lenders, in their cases usually the IMF. Also needless to say, I have often wondered if I live in one (I live in Rome). Well now I know.
I am a bit amazed by DeGrauwe’s ability to be diplomatic. He warned the ECB to cease and desist noting the risk that their independence might be endangered by their contempt for Democracy.
I’d be more inclined to call for a Democratic revolution starting tomorrow in Greece.
Nicely and importantly done.
By the way, look to the work of Vicente Navarro on Greece, Italy, Spain, Portugal and Ireland. Navarro is unknown to American economists so far as I can tell:
December 28, 2014
The End of an Era and the Beginning of Podemos
What is Going On in Spain?
By VICENTE NAVARRO
Barcelona
Vicente Navarro, is professor of Public and Social Policy in The John Hopkins University USA and the Pompeu Fabra University Catalonia, Spain. He is also the Director of the JHU-UPF Public Policy Center in Barcelona, Spain.
Well, there was a Democratic revolution started in Portugal, Ireland, Greece and Spain back in 2001. Within 7 years nominal unit labour costs had risen as follows (2008 over 2001) :
Germany 0,69%
Ireland 30,64%
Greece 27,06%
Spain 25,74%
Portugal 14,61%
Current account in 2008 stood at :
Germany 5,8%
Ireland -6,3%
Greece -16,3%
Spain -9,2%
Portugal -12,6%
It is pretty clear that democracy can lead a country into pricing itself out of the world market. Whether it can stay there for long is another matter. But I doubt Trichet or anyone else, outside those countries that take that self-destructive option, can be blamed.
Even today, unit labour costs, relative to the start of the euro are as follows (2014 over 2001) :
Germany 14,08%
Ireland 17,74%
Greece 21,53%
Spain 21,11%
Portugal 13,23%
So, the Greeks do not seem to have had it so bad. Once those figures get known a bit more widely, we can wonder about the Democratic revolution starting in Germany.
We will miss labor unions when some of the 1% succeed in totally eliminating them. I miss them already. Government, labor unions, the 1%, soylent green – they’re all people, just people. Some good, some bad, which is why we need checks and balances.
Anne, Welcome to AB. I haven’t seen you comment here before, I am happy Robert has drawn you in.
16 priors recently on Robert’s posts. Caught her early and approved. I agree with you.
@George
Europe has a lot of different problems.
First the huge problem which you document (thanks) is separate from the Greek debt crisis (The Spanish state is paying 2.5% on long term bonds — the lowest on record).
Second it is therefore separate from Austerity. It certainly is not related to Europe wide austerity. German fiscal stimulus is perfectly feasible. But also Spain and Italy can service their debt. Austerity is required by the growth and stability pact, not by allarmed investors.
In 2000 Germany was priced out of markets. Some of the shift was moving to balance before moving to unbalanced the other way. But note, German competitiveness was not restored by wage cuts in Germany. It would be much easier for the Piigs to adjust if Germany had higher inflation. The European rule can’t be 2% inflation on average and inflation no higher than 2% in any country. That would rule out the elimination of the unit cost misallignment which you denounce.
The reckless banking and house building of Spain and Ireland do not make a sustained recession inevitable. Iceland outdid them in crazy banking and ended up with proportionally much more massive foreign debts, which they couldn’t pay ($5,000 per capita IIRC). They now have 5% unemployment (I just checked). They handled the problem the old fashioned way — by defaulting. Of course they do have to pay 3% to borrow for 10 years so there is a cost of defaulting.
Some may find links to the actual letters to be helpful:
Trichet:
https://www.ecb.europa.eu/pub/pdf/other/2011-08-05-letter-from-trichet-and-fernandez-ordonez-to-zapateroen.pdf
Response (unofficial translation):
https://www.ecb.europa.eu/pub/pdf/other/2011_-_en_translation_-_letter_mr_zapatero_to_mr._trichet-translationen.pdf
From:
https://www.ecb.europa.eu/pub/pub/ecb/html/index.en.html
Of course Europe has a lot of different problems. I supposed, though, that the present thread was about one specific problem : The insistence, supposedly undemocratic, of the European Central Bank (ECB) on countries pricing themselves back into the world markets.
Suppose the electorate in one Eurozone country decides to vote democratically itself out of the world market. Now, suppose the ECB increases inflation throughout the Eurozone to help that country price itself back into the world market. How democratic is that ? Is democracy about shifting the burden of the knowingly foolish choices of some on the whole ? Should not the electorate in less foolish countries be democratically consulted ?
Even more to the point, it is pretty certain that any relaxing by the ECB would mostly leak out of the economies of the European South and into, say, the Chinese economy. The tradeables sectors of those economies have been so severely damaged, that it will be many years before they can recover. The wider point is that, in view of the competition in world markets, it will not pay to relax, since that would only suck imports into the entire Eurozone, including, now, Germany. So, it, too, would end up in the same fix.
As for Iceland, may I point out that unit labour costs in 2014 got to be almost at the level they were in 2001, while, in Greece, they were 21,5% higher. [And, despite this cost misalignment, Greece will have a small surplus in its current account in 2014.] Thus, it would appear that there is a yet steeper cost associated with defaulting, apart from higher interest rates : much lower wages.
It is worth looking into capital costs, too, in the Eurozone problem-countries. Capital costs seem to have been at their lowest ever, so much so as to facilitate a trend in investment away from tradeables and into non-tradeables, thus further worsening the current account. Here are two references, one more technical, the other more readable :
Another important factor that led to the present ruin is the sharp rises in spending on (mainly social) transfers in the said countries (2008 over 2002).
Germany 4,7%
Ireland 53,7%
Greece 61,4%
Spain 41,5%
Portugal 29,8%
that cannot be reversed much any more, given the present humanitarian crisis (2014 over 2002) :
Germany 17,2%
Ireland 59,8%
Greece 38,2%
Spain 56,0%
Portugal 40,8%
There were, also, reforms to reduce inequality :
http://www.alternatives-economiques.fr/pics_bdd/article_options_visuel/A300013A.GIF
( drawn from here :
http://pratclif.com/economy/alter-eco/modele-allemand.htm )
that do not seem to have exactly succeeded.
It is too easy to blame Trichet for all this and claim that Democracy gets assaulted. It is especially dangerous to make scapegoats of the leaders in those countries, too. It was (and is) extremely difficult to shift public opinion while the going was good.
“Of course Europe has a lot of different problems. I supposed, though, that the present thread was about one specific problem : The insistence, supposedly undemocratic, of the European Central Bank (ECB) on countries pricing themselves back into the world markets.”
Why did you make this assumption?
(Also, note that real wages – mostly in private employment – are not subject to direct government policy intervention.)
The problem lies here, as it often seems to do, in the inappropriate use of collective nouns or pronouns. The ECB cannot insist on “countries” pricing themselves back into the world markets. If “countries” had their own currencies and controlled nominal exchange rates, this would be a policy option, but this is not the case. Asking for budget cuts (predominantly at the expense of ordinary people) is not the same as changing relative currencies. Note also that cuts in nominal wages, would make some debts unfinanceable (which is one reason that such are associated with rising unemployment – long term contracts – such as rent contracts another).
In the original post, there is this bit of text, that I think is the core fact that generated the objections of the original poster :
“The letter contains a detailed list of what according to the ECB needs to be done in the labor market. Thus, collective agreements should be abolished and should be organized at the level of the individual firms. In addition, these agreements should not contain indexation clauses, even when these are entered into freely.”
I expressed a view as to what motivated that particular letter by the ECB. One is free to argue that there was no connection between the dysfunctional labor market in many countries of the Eurozone South and the balance of payments deficits in those same countries and I am sure we will all be delighted to know those arguments.
A faster rate of inflation in the whole Eurozone is a worthy subject, but, I think, somewhat more distant from the main thrust of the thread.
As for the effect of government policy on the level of wages, even in the private sector, one ought to bear in mind that, at least in Greece, the minimum wage was set in response to pressure by very political trade unions, resulting in many outsiders being forced out into the informal labour market. Of course, those outsiders could not borrow against their pay packets, so Greece has a much smaller private debt problem than the other problem-countries.
It is interesting to note that the Greek government pre-euro had had control of its own currency and exchange rate for many decades. As a result, anyone who would save faced negative real interest rates of the order of minus 10% per annum, so as to enable supposedly virtuous officials at the Bank of Greece and the Ministry of Planning to finance their favourite projects at a minus 10% interest rate ! Now, much good came of this for ordinary people and, of course, significant fortunes for the better-connected. Ordinary people in Greece support the euro from bitter experience with the alternative.
“Ordinary people in Greece support the euro from bitter experience with the alternative.”
Maybe fewer of them than you think, perhaps also from bitter experience.
Where is the evidence that, without the euro, they would be better off ? The record of 1932-1992 is pretty conclusive. Certainly, many entrepreneurs of the crony and parasitic type, perhaps the only ones who could exist pre-1994 (year in which capital controls were lifted), would like to get rid of their debts in euro and buy up all they can with the cash they have stashed abroad. But it is impossible to find one person who would have played by the rules, pre-1994, who could prove that his or her living standards were higher then. The one valid argument in favour of Greece leaving the Eurozone is, perhaps, that the living standards of ordinary persons can be cut immediately and without the fuss of internal devaluation. Curiously, nobody arguing for Greece leaving the Eurozone chooses to spell out that argument.
This is not to say that Greek voters cannot be convinced to take the risk. After all, they have a long history of self-destructive decisions.