economics

Spain, Greece and the Race to the Bottom

An article  in today’s (6/3/2015) Wall St. Journal perfectly describes what all the pressure on Greece’s Syriza-run government to further cut living standards is really all about. It focuses on what’s happening in Spain, another EU country. There had been a huge speculative boom in real estate in Spain, just like in the US, and around the same time. That boom inflated both the incomes and the expectations of millions of Spanish workers and middle class people, also like in the US and, also like here, the crash brought them back to Earth with a hard landing.

Now, the Spanish economy is “recovering”, with workers starting to go back to work, but at vastly reduced wages. (Sound familiar?) In other words, there is a slight uptick in investment because it’s more profitable to invest in Spain now, due to the lower wages. But this has its limits: As the Wall St. Journal explains about Spain’s next door neighbor, Portugal, “a slide in consumer spending has put a drag on Portugal’s recovery.” The same holds true for Spain as well as several other countries.

European Economy at a Glance. "Labor costs also weigh on businesses in France and Italy. Cuts in social-security taxes over the past year brought relief to employers in both countries, only to be offset by ongoing wage growth in France.  A major part of Spain’s recovery strategy has been to spur exports. New labor contracts that cut wages helped persuade car makers to shift some production to Spain from elsewhere in Europe." (WSJ)

European Economy at a Glance. “Labor costs also weigh on businesses in France and Italy. Cuts in social-security taxes over the past year brought relief to employers in both countries, only to be offset by ongoing wage growth in France.
A major part of Spain’s recovery strategy has been to spur exports. New labor contracts that cut wages helped persuade car makers to shift some production to Spain from elsewhere in Europe.” (WSJ)

Keynesians

The liberals (“Keynesians”) say the solution is simple: Boost wages. But not so fast. The WSJ explains the basis for the (weak) recovery: “Spanish exporters are gaining market share within Europe and beyond. But the way they are doing so is by reducing their costs (that is, cutting wages) and selling for less.” In fact, in today’s global economy, all these countries have a long ways to go: “Other countries on the eurozone periphery are also struggling to sustain recoveries and overcome one of their biggest weaknesses—a competitive disadvantage against leaner economies.” In other words, they are competing with Turkey, Vietnam, China, you name it. The “solution” is to cut wages to the level of the workers in those countries. But that’s no solution whatsoever, since as the WSJ article explains, the wage cuts simply cut into demand, further dragging down the economy.

Another aspect of the global competition is lowering the value of a country’s currency. Doing so cheapens the price of exports to other countries, but it also raises prices domestically. Equally important, just as with wage cuts, what amounts to currency wars is a never-ending downward spiral.  What recovery that exists in the EU is partly driven by such a currency war. As the WSJ explains, “For selling beyond the eurozone, a now-cheaper euro provides help.” At least for as long as their competitors don’t cut their currencies value!

Greece & Syriza

All of this is very relevant to what’s happening in Greece. There, the Syriza government had come to power based on the promise of reversing the draconian cuts of recent years. They immediately came under pressure from European and international capital and at this point it seems they might be retreating. A major reason is their failure to really seek to mobilize both their own working class as well as the workers throughout the European Union and beyond. They have failed to explain that the more the Greek workers take cuts, the more the Germans, French and everybody else will come under the same pressure.

The Wall St. Journal article is proof of this.

Categories: economics, Europe

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