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The Eurozone’s ‘New Austerity Model’

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In the coming weeks and months, as the Eurozone economy weakens still further, it is likely that debates and splits within the Eurozone capitalist elites will continue to intensify.

The Eurozone economy has never really recovered from the 2008-09 financial crash and recession. Austerity policies—that played a major role in preventing a sustained Eurozone economic recovery for the past five years—are now evolving into still newer forms.

Events in the recent past in Spain, measures approved in just the past week by the newly formed Renzi government in Italy, and proposals being debated at this very moment by the Holland government in France all point the way to the new forms of austerity now taking shape in the Eurozone.

No longer just cuts in government social programs and elimination of subsidies for the working poor, as before, the ‘New Model’ for Austerity emerging in the Eurozone consists of direct attacks on workers’ wages and incomes.  The plan is to hold down wages in order to lower business costs and price of exports. Boosting exports in turn, it is hoped, will lead to more investment which has been steadily declining for years in the Eurozone.  This scenario takes place under the cover of what is being called ‘structural economic reforms’ in general and, specifically, ‘labor market reform’ as the central element of general structural reforms.

Eurozone Recessions: What’s Different This Time  

The Eurozone’s 18 economies have already experienced two recessions since 2008. Sandwiched in between were two very brief, shallow and weak recoveries. This past spring, the region descended once again into recession, its third.  The first recession represented the region’s participation in the global financial and economic crash of 2008-09. The second recession of 2011-12 was concentrated largely in the region’s periphery economies— especially Greece, Italy, Spain and Portugal. The current 2014 recession appears will have even a wider potential impact.  Now France and Germany—the latter comprising 29% of all Eurozone output—appear leading the way and slipping into recession.

Germany’s economy grew and thus dampened the decline of the second Eurozone recession.  But it declined in the second quarter this year, 2014, and almost certainly will do so again in the 3rd  quarter just concluded on September 30.  Recent monthly data show German factory orders falling -5.7% last month, the most since 2009; its industrial production fell -4%, and its exports declined by -5.8%.  With the ‘core’ Eurozone economies like Germany weakening this time, leading the way, the Eurozone’s 3rd recession may thus prove not only qualitatively different, but potentially even more severe.

The 2014 recession comes at a point in which the entire region is still collectively more than -2% below its peak in 2008. Spain’s economy today, in 2014, remains -6.5% below its peak and Italy’s still 9% below peak. After five years of ‘recovery’, France’s output is only 1% higher than five years ago in 2008, and Germany’s only 3%.  That’s less than a half percent growth per year after five consecutive years for the two largest economies, Germany and France. Best case, that’s a five year stagnation in the region’s two largest economies, while Italy and Spain, the next largest economies, still remain mired in deep recession and depression, respectively, after five years with no real recovery for either on the horizon.

Perhaps the best indicator of the deep weakness of the Eurozone economy today is its labor market. In the region overall, unemployment has remained consistently in the 11%-12% range now for more than five years now. In Italy more than 12%, France 10.5%, and in Spain still  nearly 25%.  But the picture is even worse than these often reported general job statistics. Youth unemployment rates in both Italy and Spain, for example, are 45% plus.  And those youth who have been able to obtain work, have been largely limited to part time and temp work.  In France the percent of youth in the workforce age 15-24 who are employed as temps has risen to 59%. In Germany 52%, Italy 54%, and in Spain an incredible 65% can only find temp work, when any work at all.  And it’s not just age 15-24 youth workers. In Italy, 70% of all new hires have been temp workers. Temp means lower wages, fewer benefits, far less job security, and employer ‘rights’ to layoff and fire at will. The chronic high unemployment and the large number of low wage temp jobs translates into wage compression in general, with few exceptions, for the rest of the Eurozone working class

Nevertheless, the target of the ‘new model’ austerity now on the Eurozone agenda is designed to extend and deepen that wage compression by introducing what is being called ‘labor market reform’.  In addition to high unemployment and temp hiring, which will continue as a dual force already depressing wages, the new 3rd force of ‘labor market reform’ will extend wage cutting further, targeting the non-temp, permanent Eurozone working class in Italy, France, and elsewhere in particular.

The rationale behind the new direct attack on wages is the argument by a growing number of Euro capitalist elite and politicians that Europe must somehow ‘export’ its way out of its latest recession.   Central bank monetary policies have failed for five years to get the Euro banks to lend.  And prior forms of austerity policy have not reduced the growth of government and private sector debt. So exports must be the answer. The focus on exports means that the costs of production must be reduced.  That means in turn a reduction of labor costs—i.e. by cutting wages and by finding other ways to raise productivity. And that means so-called ‘labor market reform’—i.e. the cover phrase for wage reduction.

Spain: Testing ‘Internal Devaluation’ by Wage Reduction

The forerunner to this new model austerity has been tested in the past two years in Spain. Depression level unemployment of 25% has driven down wages.  Hiring of mostly temp workers in the past five years has further kept wages depressed. Other ‘labor market reforms’ have been tested as well by Spain’s conservative Rajoy government, including introducing limits on collective wage bargaining by workers.

The result in Spain has been lower production costs that have made Spanish exports more competitive in recent years. To the extent that Spain’s economy has ceased declining recently, it is largely because of its exports rising—export gains made possible by steep wage reduction that have lowered costs and therefore prices of exports.  While economic growth has only risen 0.6% in latest figures, it has halted the further decline of Spain’s economy. This fact has not been lost to capitalist policy makers elsewhere in Europe. The Spanish policy of reducing costs and prices of exports by reducing wages is sometimes referred to as ‘internal devaluation’.  With the Euro as its currency, Spain cannot formally devalue its currency by itself to get a cost-price advantage to boost exports.  But it can ‘internally devalue’ and boost exports by  labor cost reduction, which it has.

But pushing unemployment up to 25% levels in France, Italy and elsewhere—as currently exists in Spain, Greece, and lesser extent in Portugal—is not a political option for Italy, France and the core economies of northern Eurozone.  Unemployment of around 12% today throughout the Eurozone for the past five years is already leading to a distinct rightward shift in politics throughout the continent. Nascent far right and fascist parties are growing everywhere. Eurozone capitalist elites realize that future political instability will not help economic recovery in Italy, France and the ‘core’ Euro economies.  They recognize that a similar political upheaval on their eastern border, in the Ukraine, has already taken a serious toll on their economies.  So engineering a 25% unemployment level as a means to deeply depress wages—as in Spain and elsewhere is not possible in the core economies of the region.  Another way must therefore be found in France, Italy, and the core northern economies now slipping into recession in order to generate an export-driven recovery.  ‘Internal devaluation’ to reduce labor costs will have to take another form. That ‘other way’ is ‘labor market reform’—i.e. wage reduction by another name targeting the non-temp permanent employed workforce.

Italy’s Labor Market Reform

Last February a new prime minister, 39 year old Matteo Renzi, was elected and assumed control of government policy.  Renzi immediately proposed structural and labor market reforms upon entering office. In fact, he made the ‘labor market reform’ his first announced and first priority. Renzi’s reform proposals were adopted by the Italian Senate just last week, in early October 2014. They are expected to pass the Italian legislature by year-end and are scheduled to take effect sometime in 2015.

Not all the details are apparent as yet, but some outlines are. About one fourth of all of Italy’s 25 million workers are the target of the new reforms.  What is known so far is that Italy’s new ‘labor market reform’ rules will make it easier for employers to hire and fire workers—both newly hired permanent workers as well as temp workers. Permanent workers now will also be easier to layoff and fire. Workers will have less access to court action if they are fired.  No doubt anticipating a rise in permanent jobless as employers are given a freer hand to shed workers, Renzi’s measures call for a big increase in spending on unemployment benefits of 18 billion Euros.  New hires’ benefits, severance pay, and rights will also be reduced when initially hired, and only slowly ‘phased in’ as they gain seniority on the job. Limits on workers’ collective ability to wage bargain are reportedly to be part of the new ‘reforms’ as well, although details so far are lacking what this will mean. Spain’s previous implemented similar measures to limit wage bargaining may serve as a start point or template perhaps.  Not only will the labor market reforms lower business costs by compressing wages for new segments of the working class, but Renzi’s reforms include reducing costs by business tax reduction. Business labor tax cuts  equivalent to 32 billion Euros are part of the Renzi reforms.  Declining tax revenues will likely require more government spending reductions, thereby ensuring traditional austerity measures will continue as well.

It is important to note that previous forms of austerity are projected to continue, both in Spain and Italy.  The new structural and labor market reforms are in addition to, not in lieu of, previous forms of austerity.  Up to now, Eurozone Austerity measures have assumed three basic forms. Austerity has meant deep reduction in government spending, especially on social programs, with corresponding deep cuts in government jobs and government infrastructure investment.  Austerity has also taken the form of governments selling off public assets to private investors to then exploit for profit. ‘Privatizing’ public assets means selling parts of the national health care systems, previously nationalized companies, nationalized utilities, public banks, etc.  Austerity to date has also meant raising fees, government charges, new taxes of various kinds imposed on consumers and working class households, while simultaneously eliminating essential food, transport, and other subsidies for the working poor.  These are the ‘old’ traditional forms of Austerity; the new forms will occur under the cover of so-called ‘labor market reform’ and other structural economic reforms.  Previous forms have been designed to make workers pay indirectly for the recession and failed Eurozone central bank recovery policies since 2009.  With labor market reform, the new focus is on more direct wage and income reduction.

France to Follow Italy–Slowly

The push for structural and labor market reform is part of a growing consensus among Eurozone capitalist elites in general that a shift to some kind of growth policy is necessary if Europe is not to descend even faster and deeper into recession.  Labor market reform, and broader structural economic reform, is increasingly viewed as the way to generate investment and growth.  Prior strategies since 2009 aimed at stimulating bank lending by massive central bank money injection have clearly failed in the Eurozone (as they have in Japan and the USA). Government and private debt levels have also continued to rise despite five years of monetary injections. So another way to ‘grow out of the crisis’ is being debated across the region. One element coming out of that ‘growth debate’ is that the Eurozone in general, and economies like France, Italy, Spain and others should expand exports in order to stimulate in turn new investment. But first wage and labor costs must first be reduced to boost exports. That’s where ‘labor market reform’ and labor cost reduction, i.e. ‘internal devaluation’, comes into the policy and new strategy mix now in progress.

With Italy well on its way to implementing ‘labor market reform’ as a new form of Austerity, France is close behind but has not yet launched a similar labor policy.  Pressure by Eurozone capitalists and elites across the region—especially central bankers—is now growing and demanding that France speed up the process.  Indicative of this pressure are recent public statements by Jyrki Katainen, who will assume the role of vice president for jobs, growth, investment and competitiveness on November 1 for the European Commission.  Katainen last week praised Italy’s new labor market reforms, declaring “it is a very good thing they are dong”.  On the other hand, he criticized France, saying France should do more”. The IMF, Germany’s government, and central bankers throughout the Eurozone have all added their voice, in a growing drumbeat of demands that France more quickly introduce serious labor market reforms and other structural reforms.

While France lags behind Spain and Italy in implementing labor market reform, French President, Francois Holland, has promised to announce labor market reforms, and broader economic structure reforms in France, later this year and early in 2015.  Early indications are reforms will include proposals to deregulate various industries and to sell 100 billion euros of public assets—i.e. state owned companies—and to cut business tax cuts by 40 billion Euros.  France will also expand weekend and holiday shopping. That will mean more part time and temp work and possibly making workers work more overtime without being paid premiums for weekend and holiday work.  Both would reduce general wage levels.  Further reform announcements in 2015 will almost certainly include further reductions in pensions.  At the same time, as in Italy and Spain, other prior forms of austerity apparently will continue, as France has indicated it will proceed with previously committed spending cuts of 50 billion Euros.

In the coming weeks and months, as the Eurozone economy weakens still further, it is likely that debates and splits within the Eurozone capitalist elites will continue to intensify. Some will argue still more central bank QE money injection is the answer to stem the new economic decline.  Germany and central bankers will push back on this. Other new voices will continue to argue for more investment and government spending. But rising government debt levels and opposition to this by political forces in the European Commission, in Germany, and elsewhere, make the increase in government spending option unlikely.  The ‘compromise’ new direction and new policy most likely to be agreed to by the different divisions within the Eurozone capitalist elite is the growth path initially pioneered by Spain and now being followed by Italy—i.e. export-driven growth via labor cost and wage reduction under the ideological cover called ‘labor market reform’.  Exports to drive private, not government, investment and recovery. And still more labor cost reduction and wage compression—i.e. more ‘internal devaluation’—to drive exports

But boosting exports by labor market reform and wage compression raises the still deeper question of ‘who will they increase exports to? If the global economy—from China to Japan to Latin America, and even the USA in 2015 should it raise interest rates—continues to slow, as it clearly is now doing, who will buy the Eurozone’s exports?

Jack Rasmus is the author of ‘Epic Recession: Prelude to Global Depression’, Pluto Press 2010; ‘Obama’s Economy: Recovery for the Few’, Pluto, 2012; and the forthcoming ‘Transitions to Global Depression’,  Clarity Press, 2015.  His website is: www.kyklosproductions.com and blog, jackrasmus.com.

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Jack Rasmus is the author of  ‘Systemic Fragility in the Global Economy’, Clarity Press, 2015. He blogs at jackrasmus.com. His website is www.kyklosproductions.com and twitter handle, @drjackrasmus.

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