Another disaster

On thursday a split European Commission “decided to launch unprecedented legal action against member states over their effective suspension of the euro rules last November.”

“The Commission will now ask the European Court of Justice to rule on a procedure taken by finance ministers last November to avoid disciplinary action being taken against France and Germany for their persistent breaking of the rules underpinning the euro. Brussels believes the procedure was “not appropriate” and has received legal advice confirming this.

The spokesman also confirmed that the Court would be asked to “fast-track” the case, which would mean the issue is resolved in 3 to 6 months rather than one or two years. But it is up to the court to decide whether to grant this.”

Analysis by Andrew Duff MEP

I’ll writing some belated commentary of my own, but meanwhile you can talk about it here.

20 thoughts on “Another disaster

  1. It cannot be denied that France and Germany have problems with flagging economies.

    In the case of France, the scale of the problem, as indicated by what has been happening to its national GDP, is shown by this: http://www.francetresor.gouv.fr/oat/us/bmt/us6c.html

    And that is despite a continuing soft fiscal stance with recurring budget deficits on a scale that breaches the Eurozone’s Stability and Growth Pact of 1997: http://www.francetresor.gouv.fr/oat/us/bmt/us6f.html

    The question is: What needs to be done?

    There is an argument to be made for continuing with a soft fiscal stance until the economy turns round but that does not seem to have convinced either the EU Commission or the European Central Bank, which are insisting that the French government adhers to the terms of the Stability and Growth Pact it signed up to in 1997. If the Treaties, Pacts and Directives of the EU are to have any dependable meaning for all EU member states, the provisions of those agreements cannot be unilaterally disregarded.

    For reference, the text of the Eurozone’s Stability and Growth Pact can be downloaded here: http://ue.eu.int/emu/en/index.htm

    Select: 1. The Euro and Economy Policy, and then click the link: ‘compilation of legal texts and political agreements’, which leads to a file in PDF format: The Euro and Economic Policy.

  2. The sillly thing is that the penalty that the commission wants to impose…

    …would make matters worse, not better.

    Unless the commission has a larger purpose other than scoring political points and penalty money, this thing should rightfully get squashed like a bug.

  3. Patrick – I can understand why you say that: If the French government is disciplined under the Eurozone’s Stability and Growth Pact for running an excessive budgetary deficit then reducing the deficit will make the problems of France’s high unemployment rate (9.5% in November 2003 – the latest available) and negative GDP growth (GDP down 0.3% in 2003Q3 on a year before) even worse.

    I hope readers won’t be put off by all numbers in what follows but in this context it is necessary to understand what’s going on. I’ve cut out the links to data sources but can post those later if anyone would find them useful.

    The reasons for being cautious about that “orthodox Keynesian” assessment above relate to a long running issue of debate in the political economy of the Eurozone. This concerns the extent to which the Eurozone’s persistently high average unemployment rates – by the standards of both America and Britain – are the consequence of demand deficiencies in national economies or the consequence of what are variously dubbed structural reasons or market rigidities/sclerosis.

    The European Central Bank (ECB) has held to a view that the Eurozone’s unemployment problems are mainly due to structural reasons rather than demand deficiency. And the ECB has a case – and btw, Trichet, the incoming President of the ECB, in recent policy statements, has been defending the need for maintaining the discipline of the Eurozone’s Stability and Growth Pact. I’m on the side of the angels in this, for reasons that will hopefully become more transparent by the end.

    The latest average annual inflation rate for the Eurozone is running at 2.2% (provisional), which is above the ECB’s medium-term target rate of 2%. Since the launch of the Euro, the Eurozone has continued to have a problem in meeting its inflation target.

    In the case of France, there are even stronger, particular reasons for concern. France’s latest annual inflation rate is 2.5% (provisional), which hardly suggests that France is suffering from an imminent threat of deflation or a downward price spiral.

    Besides that, the unemployment rate for the under 25s in France is 20.7%, which is high compared to the Eurozone average of 15.6% and well above Britain’s rate of 12.3%. Only Finland and Spain in the Eurozone have higher youth unemployment rates. Since educational achievement and industrial training provision in France are generally good by EU standards some other reason has to be sought to explain France’s extraordinarily high youth unemployment rate. The leading candidate is that the statutory minimum wage in France is set too high. The political problem is that cutting the statutory minimum wage in France is a no-go area.

    However, it has to be said that the German case is different since the latest inflation rate there is only 1.3% on a year earlier. But there are reasons for believing that tax and welfare-benefit factors are significant contributing causes of Germany’s negative GDP growth (GDP down 0.2% in 2003Q3 on a year earlier) and its unemployment rate of 9.3%. Schroeder’s government is currently pushing through reforms on that basis.

    The reason some, like the ECB and the Dutch government, tend to be insistent on maintaining the discipline of the Eurozone’s Stability and Growth Pact is that some Eurozone national governments have rather dismal historic records on curbing inflation and fiscal deficits. If the terms of Pact are just relaxed in a disorderly way in response to prevailing political pressures, then some Eurozone governments will likely revert to old habits and the Eurozone is going to suffer a credibility problem downstream. The financial markets will become sceptical about the intent to maintain an anti-inflation discipline in the Eurozone and will start to factor in a higher risk premium in pricing Euro denominated bonds because of the expected likelihood of a higher average inflation rate in future. The outcome is that Eurozone governments, and hence their taxpayers, as well as companies, will end up paying more to borrow funds in the financial markets. There will be a price to pay.

    As someone I won’t mention famously said: There are no free lunches.

  4. Bob,
    some other reason has to be sought to explain France’s extraordinarily high youth unemployment rate. The leading candidate is that the statutory minimum wage in France is set too high. The political problem is that cutting the statutory minimum wage in France is a no-go area.

    As I understand it, the statuary minimum wage law being so high means that there’s no part-time employment, because it’s not worth it to employers to hire less than full-time.

    While this obviously makes the unemployment statistics worse than those of a country which has part-time employment, it is not so obvious to me that this is actually negative.

    Part-time employment is not equivalent to full-time employment (at least not in the U.S., outside of employment statistics). For one thing, stateside part-timers aren’t paid proportionally to full-timers, and they usually don’t get equivalent benefits (medical and life insurance, pension or 401k retirement savings account, etc.)

    While I can’t say how that compares to Britain, if the french public believes that high unemployment, and higher taxes to support the unemployed are worth it to guarantee good wages/benefits for those employed…That doesn’t seem like an irrational choice to me.

    So let’s discuss what else besides this longstanding situation needs to be “reformed” to avoid this future Euro credibility chernobyl, eh?

  5. “While I can’t say how that compares to Britain, if the French public believes that high unemployment, and higher taxes to support the unemployed are worth it to guarantee good wages/benefits for those employed…That doesn’t seem like an irrational choice to me.”

    I can see problems:

    a) The “stickiness” of employment means that restructuring in order to take advantage of new technologies and forms of organization must necessarily be slowed-down

    b) It creates what is essentially a generational “underclass” with fewer chances to increase its skills and ability to add value. This might have some effect on the sustainability of benefits for the currently employed in the future, as the intertemporal budget constraint requires ever larger transfers from an ever smaller group of workers.

    c) In some cases (i.e. France), it essentially creates a jobless racial underclass given the demographics of some immigrant groups.

    d) It means, in some measure, chucking away the abilities of some gifted young in order to preserve jobs for some mediocre old. It also means that said gifted young are more likely to emigrate to somewhere where they’re more likely to be employed. A “brain-drain”, if you will.

    e) It probably contributes to Europe’s demographic “time-bomb”, as youth unemployment contributes to later marriage and family-starts.

    Bernard

  6. Bernard,
    b) It creates what is essentially a generational “underclass” with fewer chances to increase its skills and ability to add value. This might have some effect on the sustainability of benefits for the currently employed in the future, as the intertemporal budget constraint requires ever larger transfers from an ever smaller group of workers.

    We’re talking an 8% difference between France in a recession and Britain, for an age group whose employment situation is volatile to begin with. An underclass, huh ?

    c) In some cases (i.e. France), it essentially creates a jobless racial underclass given the demographics of some immigrant groups.

    Because the U.S. and Britain don’t have jobless immigrant groups whose skin isn’t as pink as yours, right ?

    d) It means, in some measure, chucking away the abilities of some gifted young in order to preserve jobs for some mediocre old.

    riiiight, take away the jobs of those who have dependents, and give them to those who have none.

    It also means that said gifted young are more likely to emigrate to somewhere where they’re more likely to be employed. A “brain-drain”, if you will.

    I don’t consider that a minus.

  7. Pat,

    “We’re talking an 8% difference between France in a recession and Britain, for an age group whose employment situation is volatile to begin with. An underclass, huh ?”

    Sure. That 8% is a 60% increase over the gap between U.S. blacks and whites, and anyway assumes that Britain is the alpha and omega of labor market flexibility.

    “Because the U.S. and Britain don’t have jobless immigrant groups whose skin isn’t as pink as yours, right ?”

    Quite beside the point. If Europe _doesn’t_ already have such an underclass, I can’t see much point in creating one from scratch. And you’re making some unjustified assumptions about my skin-tone, hermano. ;^)

    “riiiight, take away the jobs of those who have dependents, and give them to those who have none.”

    So you owe them because they have dependents? So a bright, hard-working kid just out school owes them because they got to procreate first?

    >

    “I don’t consider that a minus.”

    Your loss.

    Bernard Guerrero

  8. “[…] So a bright, hard-working kid just out school owes them because they got to procreate first? ”

    If he is a bright hard-working kid, he will have a work. Now what work will get the kids that are in school, which is the meaning of dependent, if their parents cannot afford a good studying environment?

    In France school is quite free, but then the family must support that the kids do study. When there is no income, that turns quite hard to do. Especially for common intelligence kids which have a right to live too.

    En cuanto a la tez, sospecho que Patrick(G) debi? de pensar, si es que se fij? en el nombre, que probablement ser?a ud. espa?ol como yo, por cierto, y la verdad es que no soy muy moreno que digamos.

    DSW

  9. Antoni,

    Considerando el origen de la mayor?a de immigrantes hispanos a los EE.UU. hoy en dia, pienso que ?l se debe haber abstenido de su comentario.

    “In France school is quite free, but then the family must support that the kids do study. When there is no income, that turns quite hard to do. Especially for common intelligence kids which have a right to live too.”

    In which case, open welfare payments to the family rather than a hidden subsidy via an inefficient labor market is still the correct answer, with the added benefit that it sends the kid a clear market-signal that he or she should look to an occupation other than the parent’s former one.

    Bernard

  10. The French “allocations familiales” were quite substantive when I lived there 33 years ago, I’ve no reason to think that now they are otherwise. Still the fact that the parent are out of work is a cause of failure in the offsprings, from a statistical perspective. As of now the French have still neither the level of homicides nor of imprisoned people the USA enjoy so much.

    DSW

  11. Bernard,
    Sure. That 8% is a 60% increase over the gap between U.S. blacks and whites, and anyway assumes that Britain is the alpha and omega of labor market flexibility.

    You’ve got U.S. unemployment statistics for 18-25 year olds ? Great, post your data!

    …Because the closest thing I found: http://stats.bls.gov/news.release/empsit.t02.htm
    only broke out 16-19 year olds…

    Where the recent unemployment for whites and blacks was around 14.5% and 32%, respectively.

    Quite beside the point. If Europe _doesn’t_ already have such an underclass, I can’t see much point in creating one from scratch.

    My argument was that the U.S., Britain, and France all have large immmigrant populations at the bottom of the economic ladder, despite the structural wage/unemployment-level differences. My point is that lowering the minimum wage might reduce the unemployment level, but that wouldn’t necessarily get them up to a minimum acceptable rung.

    “riiiight, take away the jobs of those who have dependents, and give them to those who have none.”

    So you owe them because they have dependents? So a bright, hard-working kid just out school owes them because they got to procreate first?

    Would you rather they paid unemployment taxes for you, while earning enough to support their family ?
    Or would you rather that you paid sufficient unemployment taxes to support them and their family ?

    Keep in mind that you’re not going to get their wages because you’ve got no experience, work-knowledge and you haven’t yet proven your ‘giftedness’ in the workplace.

    I think the former is actually the more efficient division of labor. Again, keep in mind that you too will someday be an old fart that management would love to replace with a cheaper idiot willing to work long hours for a pittance.

  12. Pat,

    “You’ve got U.S. unemployment statistics for 18-25 year olds ? Great, post your data!”

    Strawman. I said the 8% gap you posted is large compared to the gap exhibited by a known underclass, that is, U.S. blacks vs. U.S. whites. No age stipulation was made as none is necessary, the point being that an 8% gap can loom quite large when you’re on the receiving end. The relevant white and black aggregates are 5.0 and 10.3, BTW.

    “My point is that lowering the minimum wage might reduce the unemployment level, but that wouldn’t necessarily get them up to a minimum acceptable rung.”

    I thought your point was to try and score a cheap shot using race when you thought I was lilly-white, but ok, I’ll accept the above as a substitute. :^) It still isn’t a good point. Participation in the job-market is, in and of itself, a social good. Those who are shut out for long periods become essentially unemployable, creating both a drag on general standards of living and huge problems for the shut-out group itself. Low incomes can be addressed via transfer payments that phase out as wages increase rather than cut-off cold turkey, and it doesn’t place the burden of misallocated labor on the system as a whole.

    “Would you rather they paid unemployment taxes for you, while earning enough to support their family ? Or would you rather that you paid sufficient unemployment taxes to support them and their family ?”

    I’d much rather we both work and pay, obviously. But all things considered, I imagine that the average 25-year-old would rather have the job. More importantly, a society interested in the rational deployment of assets would rather that the combination of labor producing the highest value-added be working, even if that means the oldster’s the one who goes on the dole.

    “Keep in mind that you’re not going to get their wages because you’ve got no experience, work-knowledge and you haven’t yet proven your ‘giftedness’ in the workplace.”

    Depends entirely on the position the oldster and the youngster fill respectively. You seem to think that the only impediment to hiring youth is the minimum wage, but all sorts of other inflexibilities keep labor from shifting from low-value-added to high-value-added functions.

    “Again, keep in mind that you too will someday be an old fart that management would love to replace with a cheaper idiot willing to work long hours for a pittance.”

    And if they can get equal value-added from the young idiot, they’d be right to want to do so. And society would be right to want to see it happen. Which is why the bright boys stay in school. :^)

    Bernard, 33 and a (part-time) student for life…

  13. Bernard,
    “Strawman. I said the 8% gap you posted is large compared to the gap exhibited by a known underclass, that is, U.S. blacks vs. U.S. whites. No age stipulation was made as none is necessary,”

    Unless you consider that the 8% gap I’d cited was between France and the U.K. for under -25 year olds…entry-level workers rather than an underclass. The comparison to U.S. black employment irrespective of age/experience is specious.

    “You seem to think that the only impediment to hiring youth is the minimum wage, but all sorts of other inflexibilities keep labor from shifting from low-value-added to high-value-added functions.”

    No, I said that (a) the high French minimum-wage is a major impediment to part-time hiring. (b) part-time hiring lowers unemployment statistics, but doesn’t provide the benefit of full-time unemployment. (c) if you controlled for that, Fr, U.S. and UK unemployment probably aren’t as severely out of alignment as they seem.

    As to the old-fart/young-idiot example:
    Lets put numbers to this hypothetical model:
    $45k for the old fart’s household of 4’s income.
    Some of which goes through taxes into unemployment for the young guy.

    Old guy gets replaced by the young idiot for a $25k salary…who now has to the support the old fart’s household of 4’s through his taxes.

    The employer gains because he’s managed to cut out $20k of expenses. But it’s at the expense of the rest of society (old guy+family+young guy). The employer’s gains may be increased/decreased by how much better or worse the young guy is in comparison to the old guy. The salary differential is a risk premium that the young guy pays in order to be employed. (Assuming, like you did, that the old guy is mediocre and that the young guy is gifted just loads the comparison so that it comes out the way you want it to).

    The point isn’t to churn the labor market…but really figuring out what could be done to induce real growth so that both old guy and young guy can be fully employed at the same time without either being forced out.

  14. Pat,

    “Unless you consider that the 8% gap I’d cited was between France and the U.K. for under -25 year olds…entry-level workers rather than an underclass. The comparison to U.S. black employment irrespective of age/experience is specious.”

    On the contrary. Let me crystallize the issue. You brought up the gap between British and French youth in order to make the point that the difference in youth unemployment between inflexible France and flexible Britain is not large. I’m merely pointing out that an 8% gap between two populations (or sub-populations) is not the trifle you seem to think it is. In addition, I’m not buying your implicit claim that Britain sets the standard for labor market flexibility.

    “As to the old-fart/young-idiot example:
    Let?s put numbers to this hypothetical model:
    $45k for the old fart’s household of 4’s income.
    Some of which goes through taxes into unemployment for the young guy.

    Old guy gets replaced by the young idiot for a $25k salary…who now has to the support the old fart’s household of 4’s through his taxes.”

    This portion of your claims, along with what follows it, is chock full of poor economic thinking.

    a) It implicitly buys into the “lump of labor” fallacy, assuming that the laid-off older worker must of necessity end up on the dole. T’aint so, just ask Paul Krugman.

    b) It assumes that the gains from lowering the cost of production by hiring a guy for 25K instead of 45K will be abrogated entirely by the factory owner. This conveniently waves away the effects of competition or the fact that even a monopolist can’t set prices without reference to marginal costs or the demand curve he’s facing. In reality, productivity improvements (which is what getting the same work for 20K less amounts to) will rapidly get passed through to consumers (see Wal-Mart, Carrefour). Society benefits via the effect on price levels and living standards, as well as the redeployment of the oldster into some task where he’s worth what he’s getting paid.

    c) It assumes, falsely, that the oldster will automatically be displaced under all circumstances. In reality, the oldster may well be worth a great deal more than the youngster due to his or her accumulated skill-set and experience, and will not be replaced unless the loss in productivity of losing him will be smaller than the improvement in the cost structure. To take an obvious counter-example from the trade-sphere, this must be the case or it wouldn’t be _some_ things that are made in Mexico or China, it would be _all_ things.

    This just scratches the surface, let me know if you want me to continue.

    Bernard

  15. Bernard,
    “This portion of your claims, along with what follows it, is chock full of poor economic thinking.

    a) It implicitly buys into the “lump of labor” fallacy, assuming that the laid-off older worker must of necessity end up on the dole. T’aint so, just ask Paul Krugman.”

    That’s rich coming from a guy pretending that high unemployment among entrylevel workers was the start of an ‘underclass’.

    Going on the dole after being laid off is a rational economic action. The labor market is not so friction-free that the laid off are instantly re-employed.

    […] This conveniently waves away the effects of competition or the fact that even a monopolist can’t set prices without reference to marginal costs or the demand curve he’s facing. In reality, productivity improvements (which is what getting the same work for 20K less amounts to) will rapidly get passed through to consumers (see Wal-Mart, Carrefour).

    On the contrary, a monopolist is perfectly positioned to extract productivity gains of those dependent on the monopoly without affecting the supply/demand curves.

    Walmart is a fairly good example of this. How many billions is the walton family fortune again ? How rich are Walmart’s suppliers in comparison ?
    How much are Walmart employees paid ?

    Society benefits via the effect on price levels and living standards

    This is the Bill Gates in the homeless shelter fallacy.

    as well as the redeployment of the oldster into some task where he’s worth what he’s getting paid.

    This assumes that his previous employer was irrationally paying him more than the old guy was worth. That’s not a shining example of sound economic thinking on your part.

    c) It assumes, falsely, that the oldster will automatically be displaced under all circumstances. In reality, the oldster may well be worth a great deal more than the youngster due to his or her accumulated skill-set and experience, and will not be replaced unless the loss in productivity of losing him will be smaller than the improvement in the cost structure.

    Ah, you belatedly acknowledge that not all “oldsters” are parasites to be replaced by “gifted” youngsters…

    May I suggest that such a calculation (a) involves some intangibles and some unknowns that business executives rarely correctly weigh when comparing against the hard numbers that they do have, and (b) business executives are focused on maximizing profit, and minimizing costs by maximizing third party externalities is more effective in the short term than, say, competition and/or innovation.

    To take an obvious counter-example from the trade-sphere, this must be the case or it wouldn’t be _some_ things that are made in Mexico or China, it would be _all_ things.

    You may want to (re?)read Krugman on this topic.

  16. Pat,

    “That’s rich coming from a guy pretending that high unemployment among entry-level workers was the start of an ‘underclass’.”

    I won’t even try to parse that one. I say it _is_ the start of an underclass, and you haven’t cited anything from Krugman that says otherwise.

    “Going on the dole after being laid off is a rational economic action. The labor market is not so friction-free that the laid off are instantly re-employed.”

    Going on the dole is rational if the dole offers a high replacement rate for lost income, but that’s quite beside the point. The “lump of labor” fallacy you buy into implies that the laid-off worker _must_ go on the dole because the amount of work available is fixed. This is simply not the case. There may be a gap for individuals, particularly the more out-of-date their skills are, but work and product will both go up eventually. If it’s the gap that troubles you, then the proper solution is (as elucidated by none other than Shrub last night) short-term spending on retraining, which will cost as much as the dole but leave society better-off, net, as the final deployment of labor will be more efficient.

    >>Society benefits via the effect on price levels and living standards

  17. “That’s rich coming from a guy pretending that high unemployment among entry-level workers was the start of an ‘underclass’.”

    I won’t even try to parse that one. I say it _is_ the start of an underclass, and you haven’t cited anything from Krugman that says otherwise.

    I don’t need to cite Krugman for this (there other economists besides Krugman, you know), I simply need to point out the inherent contradiction in simultaneous maintaining:

    1. That french entry-level workers will only bemarginally attached to the labor market over the long term (to wit, an underclass) because older workers aren’t being pushed out to make way for younger workers.

    2. that there is a demographic timebomb where the french population is not growing fast enough.

    Going on the dole is rational if the dole offers a high replacement rate for lost income, but that’s quite beside the point.

    Even a low income replacement rate is advantageous compared to no income.

    The “lump of labor” fallacy you buy into implies that the laid-off worker _must_ go on the dole because the amount of work available is fixed. This is simply not the case.

    No, I’m saying that laid-off workers will go on the dole, because it makes sense to do so. They may stay on the dole because the amount of work available is *NOT* fixed.

    The flaw in your logic is that you assume that it will always grow. Consider the ramifications of the amount of work shrinking. consider the shrinkage of the U.S. labor force over the past three years or so.

    I dunno about you, but Ricardo’s iron law of wages comes to my mind.

    There may be a gap for individuals, particularly the more out-of-date their skills are, but work and product will both go up eventually. If it’s the gap that troubles you, then the proper solution is (as elucidated by none other than Shrub last night) short-term spending on retraining, which will cost as much as the dole but leave society better-off, net, as the final deployment of labor will be more efficient.

    A lot of the “retraining” directed towards the lowest tiers of the labor force is often little more than fool-money-extraction scams.

    Anything advocated by Shrub should certainly be considered so until proven otherwise.

  18. Patrick,

    It seems that opposition in Sweden to joining the Euro has increased since the referendum there last year.

    The latest news update:

    “Eurosceptics in Sweden are to form a new political party and to present it within two weeks, according to Swedish press. The new party will be politically in the middle of Swedish party politics and headed by the Social Democrat and former chief economist at Nordbanken, Nils Lundgren. Former Swedish national bank governor Lars Wohlin will also be on the list. . . ” – from: http://www.euobserver.com/index.phtml?sid=9&aid=14188

    So much for the story that only Conservatives and others on the fringes of politics are sceptical about the Euro.

  19. Bob,
    “So much for the story that only Conservatives and others on the fringes of politics are sceptical about the Euro.”

    I don’t think I ever said or implied that.
    I don’t begrudge anybody their scepticism about anything.

    For myself, I’m more sceptical of the Dollar than I am of the Euro, and of the governments that stand behind those currencies…but that’s just me.

  20. Patrick,

    “I don’t think I ever said or implied that.”

    No you didn’t and I apolgise if that could be construed from my post.

    What worries me is that the claim made or implied by others that opposition to joining the Euro is just a “Conservative” thing is regularly deployed to close down rational discussion of the Eurozone’s undoubted problems. Notoriously, Blair uses that rhetorical device in the British Parliament.

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