Europe and the Law of Sticky Wages

[globaleconomicollaps]

http://www.telegraph.co.uk/finance/c...technical.html


Europe and the Law of Sticky Wages (technical)
How is wage erosion going to play out across Europe’s Arc of Depression?
BRITISH PAYSLIP SHOWING NET PAY AMOUNT AND CURRENCY
The EMU strategy of wage deflation across half Europe is simply not doable Photo: Alamy
Ambrose Evans-Pritchard

By Ambrose Evans-Pritchard

6:41PM BST 05 Apr 2012



The Federal Reserve Bank of San Francisco has an essay on its website showing that US wages in the industries in most trouble have scarcely dropped at all since the onset of the Great Recession - despite economic - even though the country has one of the most flexible labour markets in the world.

You can erode real wages through inflation, but it is nigh impossible to cut them in absolute terms. They are famously "sticky", as Keynes warned in the 1920s. Call it cultural resistance if you want, or human psychology, or common sense.

Employers are loathe to cut to nominal wages because this "can reduce morale and prompt resistance even in difficult economic times (Kahneman, Knetsch, and Thaler 1986)".

So how on earth is this going to play out across Europe’s Arc of Depression, with Franco-era labour laws still only partially reformed in Spain, and Mario Monti struggling to push through reform of Article 18 of the labour code?

Portugal, Italy, and Spain need an "internal devaluation" of around 20pc to claw back competitiveness within EMU. This means draconian wage cuts for year after year.



Yes, Mussolini pulled off a 20pc cut in wages with Fascist control over the unions to underpin his Lira Forte policy in the late 1920s. How can a democracy bring about such cuts in private sector wages without use of police coercion?

The Baltic states have done so in very particular circumstances, but mostly with devastating falls in GDP (26pc top to bottom in Latvia, and some have the gall to cite Latvia as a success story). Such economic contractions across Club Med as a whole would be large enough in aggregate to tip the whole eurozone into catastrophe.

The combined public and private debt burden in Spain, Italy, and Portugal is much larger as a share of GDP than in Estonia, and even Latvia. The risk of debt-deflation dynamics is much greater.

The EMU strategy of wage deflation across half Europe is simply not doable. It was tried in the early 1930s, with results of varying awfulness.

The 500 deflation decrees of Pierre Laval in 1935 led to violent docker strikes in France, with police killings, mass protests and ultimately the electoral uprising of the Front Populaire in alliance with the Communists - at which point, capital flight forced the collapse of the Gold Standard in any case.

The whole gruelling episode caused by five years of deflation proved pointless in the end. It pushed France dangerously close to conflict, some even say civil war.

This in a nutshell is what Europe is now doing to a string of countries.

Why? For What?

[makimanos]

Re: Europe and the Law of Sticky Wages

Why?What?
Nobody can live in perpetual debt. If you can't inflate your way out
since you haven't your own currency there is no other way. And watch Paris.
European revolutions always start from there and then always there are "symbolic
acts of violence" in order to be a continuance, as the great George Sorrel proposes. And then a Robespierre rises.

[GRG55]

Re: Europe and the Law of Sticky Wages

Why?What?
Nobody can live in perpetual debt...

Why not? As long as the debt costs can be serviced. I don't sense that the efforts to "bail out" Greece will free it of debt...in fact initially it seemed to be exactly the opposite. Lately it's been outright debt repudiation. But through it all a steady stream of forecasts showing Greece would remain debt-laden "forever" (which I am certain it will) but increasingly able to service that burden.

If you can't inflate your way out
since you haven't your own currency there is no other way...

Sure you can. The Germans are losing this war. The Greeks have everyone else on their side in the re-flation battle. The Italians have made inflation a historical national sport. The Spanish aren't far behind, as long as their macho reputation isn't questioned. The resident of the Élysée would like us to believe that he is as prudent as the Prussians, in a French sort of way, but let's remember this is the country that subsidizes every farmer from Nice to Normandy.

The Germans are to Europe what Saudi Arabia is to the Arab Gulf...as long as the money keeps coming they get to have the most say at the table. But when the day comes that they close the spigot, the other club members will have no reason to pay any great attention to what they say. So how much longer do you think the German taxpayers and politicians can stand the financial and political pain?

And watch Paris.
European revolutions always start from there and then always there are "symbolic
acts of violence" in order to be a continuance, as the great George Sorrel proposes. And then a Robespierre rises.

Bingo.

I'm not sure we'll see the return of the guillotine any time soon, but we can't be far removed from tractors-in-the-streets. :-)

[makimanos]

Re: Europe and the Law of Sticky Wages

We watched in Tunisia, Libya, Egypt, Syria things that we couldn't imagine.
Since when is Europe immune? And why do you think that the Germans will
surrender? It's a police state like Switzerland . If you have lived in Europe you would know that Paris is
falling apart along with the imperial London. And you never know when and where
the thunder will strike and the boat will capsize. Will the Yankees come again this time to the rescue?

[GRG55]

Re: Europe and the Law of Sticky Wages

We watched in Tunisia, Libya, Egypt, Syria things that we couldn't imagine.
Since when is Europe immune? And why do you think that the Germans will
surrender? It's a police state like Switzerland . If you have lived in Europe you would know that Paris is
falling apart along with the imperial London. And you never know when and where
the thunder will strike and the boat will capsize. Will the Yankees come again this time to the rescue?

I never said the Germans would "surrender". I said they would exit.

And I have lived in London, and if you follow my postings over the years you will know I still regularly spend time in Switzerland, Germany and sometimes France.

[makimanos]

Re: Europe and the Law of Sticky Wages

I apologize although today's London is an accident in the making and as I mentioned Switzerland and Germany are police states. But surrender or exit what is the difference? My opinion is that the end of the Euro will start with France.

[GRG55]

Re: Europe and the Law of Sticky Wages

I apologize although today's London is an accident in the making and as I mentioned Switzerland and Germany are police states. But surrender or exit what is the difference? My opinion is that the end of the Euro will start with France.

In one form or another seems to me that every nation is a police state.

It's all a matter of degree. Compared to Syria or any of the Central Asia Republics, Switzerland and Germany are benign. The USA Homeland Security agency has yet to match the U.K., but it's closing the gap quickly (about a year ago I was taken aback on reading an article that mentioned there are 32 CCTV security cameras on Brunel's historic Clifton suspension bridge over the River Avon). I don't think it's possible to walk anywhere in Central London without being on camera.

The "rule based" well ordered societies of Switzerland and Germany obviously appeal to some...but I suspect I am in your camp. I find them a bit oppressive, and I would have difficulty living for an extended time in either of those nations. On the other hand, I find the chaos of Cairo or New Delhi equally interesting, but again only as a visitor.

As for the end of the Euro, I continue to maintain my longstanding position that the logical first exit is Germany. And you may well be correct that the process really gets underway if (when?) France finally breaks ranks with Germany over ECB reflation policy.

[c1ue]

Re: Europe and the Law of Sticky Wages

As for the end of the Euro, I continue to maintain my longstanding position that the logical first exit is Germany.

As long standing as this?

http://www.itulip.com/forums/archive...hp/t-8360.html

The PIIGS won't pull out of the EU. They might be booted out.

The scenarios are very straightforward:

1) Germany doesn't bail out the PIIGS (and Austria). The APIIGS start issuing toilet paper euro bonds. A de facto 'good' Euro and 'bad' Euro emerge. The whole point of the EU basically is nullified.

2) Germany does bail out the PIIGS. As a price for its intervention, Germany takes even more control over EU finances.

3) Germany leaves the EU to its own mess. Guess who they'd partner with?

[WildspitzE]

Re: Europe and the Law of Sticky Wages

read this piece GRG and thought of you.

Why Germany Should Leave the Euro Zone


http://business.time.com/2012/04/12/...-the-eurozone/

"Most discussion about a potential breakup of the euro zone assumes that Greece and other financially troubled countries would be the ones who ended up abandoning the common euro currency. But there’s a compelling alternative to that conventional wisdom — that the true problems of the euro zone could be best addressed if Germany were the one to leave, accompanied, perhaps, by a few other rich countries.

..."

[Starving Steve]

Re: Europe and the Law of Sticky Wages

As usual, I am baffled and lost..... Europe, Canada, America and Japan are deflating as an experiment, because the old "gentle inflation" experiment gently destroyed our savings and our retirement plans. Everything we worked for went gently down-the-drain.... Looking back at the early 20th C, those in Europe who wanted to experiment with a government "gently managed" inflation were morons. Their gentle inflation experiments brought about hyper-inflation, then Adolf Hitler and the Third Reich in Germany, and the inflation experiments in Spain and Italy brought about the rise of the fascists in Italy and Spain.

Even now, after more than half-a-century of hyper-inflation from "gentle inflation" experiments in Latin America and Africa, we still have Bernanke at the Fed insisting upon maintaining no less than a 2% rate of gentle inflation in America. Even now, inflation is stilled viewed as a safety-net for central bank policy failure, rather than the cancer to all Fed. policies that the inflation represents.

Aside from Bernanke's required inflationary bias in the economy, the deflation experiment going-on now is interesting: With zero interest rates, the economy grows very slowly, but that growth is real growth and not inflationary growth. That concept we have never observed before in saving or investing, at least not openly. Exposing real growth investments by this zero interest rate policy, investing and saving decisions become easier and clearer to reach.

And one more point: the zero interest rate policy stops the flow of money to those who don't produce. So, as the economy slowly grows (and in real terms) the amount of money flowing in the economy does not grow. That makes for a deflationary under-tow in the economy because money becomes scarce relative to the slight increase in goods and services produced.

This deflation experiment with zero interest rates is something the world has never witnessed before except in Japan.

[GRG55]

Re: Europe and the Law of Sticky Wages

...As for the end of the Euro, I continue to maintain my longstanding position that the logical first exit is Germany. And you may well be correct that the process really gets underway if (when?) France finally breaks ranks with Germany over ECB reflation policy.

An FT article that was brought to my attention in an email today:

Sarkozy breaks silence over ECB role


Nicolas Sarkozy, president of France, on Sunday broke a months-long pact with Angela Merkel, German chancellor, not to discuss the role of the European Central Bank in public, calling for the ECB to adopt policies to support growth...

...Paris and Berlin have long been at odds over the ECB, with France seeking more active intervention by the bank to support countries threatened by the sovereign debt crisis as well as looking to it to boost growth. By contrast, Germany has insisted the ECB stick strictly to its role in controlling inflation.

Mr Sarkozy said: “Europe must purge its debts, it has no choice. But between deflation and growth, it has no more choice. If Europe chooses deflation it will die. We, the French, will open the debate on the role of the central bank in the support of growth.”
Ms Merkel had originally intended to join Mr Sarkozy on the campaign trail to lend him her support but he later made it clear she should stay at home.