"A Social Dimension For A Changing Europe: Drifting From The Primary Dividing Up Of Revenue, Inequalities And Crisis" by Joël Maurice

Joël Maurice

The financial crisis that burst on the scene on 15 September 2008 (the bankruptcy of Lehman Brothers) was preceded by increased inequalities, confirmed by several official sources. Thus[1], the ILO[2], in its report ‘World of Work, Report 2008: Income Inequalities in an Age of Financial Globalization’ covering 73 countries, observed that between 1990 and 2005, the share of salaries in the added value had decreased in 51 countries, and notably by 9 points on average in the advanced economies; and according to the OECD in its report ‘Growth and inequalities, distribution of revenues and poverty in OECD countries (Paris 2008)’, stated that, during 1998-2008, the inequalities in revenue increased in 17 of the 20 countries analysed, and concluded that ‘the only sustainable way of reducing the inequalities is to bring to an end the underlying trend of a widening gap regarding salaries and capital revenues’.

The inequalities affected both components of added value. Regarding salaries, in the majority of countries, the gap widened in favour of higher salaries (notably managers’ salaries and the salaries of hi-tech specialists) to the detriment of insecure jobs (limited term contracts, temporary jobs, forced part-time work, ‘mini-jobs’ etc). With regard to profits, the lion’s share went to shareholders, to the detriment of self-financing of investments.

Is there a link of causality between the increase in inequalities and the financial crisis? In his analysis, ‘La crise économique de 1929 : anatomie d’une catastrophe financière’ (The Great Crash of 1929, J.K. Galbraith[3] already identified five causes of the Great Depression, the first of which he claimed was ‘the faulty distribution of revenues’. The subprime crisis in the United States in 2007-2008 was symptomatic of the disequilibrium created from start to finish by credit granted to households that were insolvent (due to their modest income), then surreptitiously transferred through the channel of securitization to ‘investors’ who were not very particular and who believed that ‘money grows on trees’. Lasaire had denounced this before the crisis exploded and called for the distribution of revenues susceptible to fostering balanced growth, allowing consumption and the sustainable growth of income at the same rate[4]. The causality between an unbalanced distribution of revenues and the crisis is also at the core of the work written by J.E. Stiglitz (2012) ‘The Price of Inequality’.

But what is happening within the European Union, and more particularly within the euro zone? A striking phenomenon is the erratic evolution of salary costs per production unit between the Member States, highlighted for example[5] by V. Glassner[6]: between 2000 and 2008, this unit cost remained virtually stable in Germany, whereas it increased by 18% in France, 22% in Italy, 25% in Spain, 32% in Ireland, and 55% in Greece. As from 2009, this cost started to increase (moderately) in Germany, and to slow down in France and Italy, and even decreased noticeably (Ireland, Greece, Portugal and Spain). In comparison with 2000, Germany had acquired a competitiveness-price advantage in relation to the Member States previously mentioned, which, although in the process of becoming attenuated, remains substantial, which is not the least of paradoxes for a country that also enjoys a solid competitiveness that is also renowned and envied, excluding costs.

It is clear that the euro zone is experiencing considerable disequilibrium, which is far from being resolved in relation to public finances, and which is reflected in the abnormally high unemployment rate in Member States (except for Austria and Germany). A tardy awareness of the macroeconomic disequilibrium has emerged and today it is recognised that we cannot consider as sustainable the disequilibrium in the current accounts between Member States some of whom have, year after year, surpluses and others who have high deficits (in 2013, according to OECD forecasts: the Netherlands: +9.9% of GDP; Germany: +6.7% of GDP; and France: -2.2% of GDP).

To re-establish the competitiveness-price within the euro zone, the Commission is recommending a strategy for countries in difficulties consisting of ‘internal devaluation[7]‘, which means blocking nominal salaries, or even reducing them somewhat, as has been observed today in Greece and Spain, for example. But would it not be simpler, as was suggested by Lasaire, to proceed with an ‘internal re-evaluation’ of the countries with a surplus? In fact, voices have been raised calling for ‘a somewhat faster inflation in countries with a surplus’ (Bruegel think-tank), or even – in a rather less convoluted manner – a certain increase in salaries in Germany (W. Schäuble in a declaration to Focus, 5 May 2012). And effectively, the salaries negotiated by the social partners in Germany (within the framework of the ‘Autonomy tariff’) have recovered a greater dynamism since 2012 (without exaggerating!) than that of other Member States. At this rate, we would nevertheless need years before returning to a more sustainable internal equilibrium in the euro zone.

It is now urgent that we deal with the unbearable level of unemployment which is overwhelming the majority of Member States. The Franco-German initiative for a European ‘New Deal’ aimed at combating youth unemployment is most welcome, but it does not resolve the fundamental problem of how to get the euro zone out of the crisis situation.

Because, and it has become an obvious fact, this zone currently does not fulfil the conditions of an ‘optimal monetary zone[8]‘. The single currency is notoriously ‘incomplete’. Notably, it would need a veritable community budget[9]. It would need provisions that would allow it to control the effects of ‘geographical polarisation’ of production (a consequence of effects of scale), i.e. a veritable community policy for territorial planning. In particular, it would need, in the absence of any possibility of modifying the exchange rate internally, a mechanism that would allow for the harmonious evolution of salaries, so as to avoid social dumping and ensure a balanced growth as well as an upwards convergence of living standards in accordance with the objectives of the Treaty (EUT Article 3.3). The tripartite social summit would appear to be the ideal place that would need to be reactivated with this purpose in mind.