Converging crises

Kindly translated by Anne-Marie de Grazia

The question of labor costs in the Eurozone has been drawing much attention in the past weeks. Basing ourselves on the available statistics of Eurostat and of the OECD, we will try here to clarify a number of facts.

First of all, when talking about « labor costs, » one must understand that we are not talking about wages only, but also about the social benefits attached to these wages. Moreover, one must know that productivity, also among the countries of the Eurozone, can vary quite widely. Therefore, the « cost of labor, » understood as the wages with the addition of the social benefits paid for by the employer, can be known for every year, as a mean for all activities.

Table 1

Hourly wages + social benefits to be paid by the employer, in Euros.

 

Germany Belgium Spain France Greece Ireland Italiy Netherlands Portugal Slovakia Slovenia
1998

25,7

26,5

14,9

23,2

9,2

14,9

17,5

21,4

6,4

2,8

7,6

1999

26,3

27,4

15,1

23,9

10

15,8

18,1

22,5

6,7

2,6

7,9

2000

27,6

28,4

15,1

25

10,4

17,1

18,3

23,4

6,9

3,1

8,2

2001

28,5

29,9

14,2

26,2

11

19

18,7

24,6

7,3

3,1

8,7

2002

29,2

31,3

14,9

27,2

11,8

20

19,4

25,9

7,7

3,5

9,2

2003

29,8

32,9

15,6

28,0

12,7

20,9

19,8

27,2

8,1

3,9

9,6

2004

30,0

32,3

16,3

29,0

12,7

21,9

20,6

28,1

8,5

4,3

9,5

2005

30,1

33,0

16,9

30,0

12,2

23,1

22,3

28,5

8,8

4,6

9,8

2006

31,3

33,9

17,6

31,0

13,1

21,8

22,7

27,4

9,0

5,1

10,2

2007

31,7

35,8

18,2

32,0

14,3

25,9

23,2

28

9,2

6,2

10,7

2008

32,3

36,4

20,3

32,9

15,7

28

23,6

30,3

8,6

7,3

12,3

2009

32,9

38,3

21,5

32,9

16,3

26,4

24,6

30,9

10,1

7,9

12,6

2010

32,8

40,1

21,7

34,2

16,8

26

25,2

31,5

10,3

7,9

12,9

2011

34,3

40,8

22

35,5

15,9

26,2

25,9

32,2

10,5

8,4

13,1

2012

35,1

42,0

22,5

36,4

15,1

26,9

26,7

32,9

10,8

8,8

13,5

2013

36,1

42,7

22,7

36,7

16,1

26,7

27,2

34,1

11,1

9,3

13,6

Source : Eurostat

One can see immediately that differences are considerable, but also that the situation in France is not as catastrophic as some want us to believe. The very large differences between countries reflect differences in productivity. We know France to be among the best performers, slightly ahead of Germany. But these data do not provide us with precise information as far as competitiveness is concerned. One simultaneously must take into account the share of work from other countries which is incorporated in a product fabricated in France or Germany, and one must have a look at how the structure of costs may have been skewed over time. For the first of these questions, there exists little global data. We know that in some activities, “German” cars incorporate a large part of components made in countries where labor costs are lower (Slovakia, Slovenia). As for the second question, one can get an idea by turning these data into indexes and using the year 1998 as a basis.

 

Chart 1

A-Gr1 CduT

Source: Eurostat

We can see immediately that France is evolving (or moving) in an intermediary position. The cost of labor, as used in this study, has increased in France more than in Germany, but almost as much as in Italy, in Belgium and in the Netherlands. Spain, where this increase has been weak at the beginning the 2000s, has joined the block around France. On the other hand, one can see that Greece and Portugal have widely diverged.

The question which must now be raised is the one about inflation. This is important in order to know if wages have kept up with, anticipated on, or limped behind on inflation, and this gives an indication about the evolution of labor costs from the small end of the binoculars, meaning, as income for the workers.

Chart 2

 A-Gr2 Infla

Data from the IMF

We notice immediately that the level of inflation is lowest in Germany, that it is very high for the « newcomers » (Slovakia and Slovenia), but also for Portugal, Spain and Greece. When one wants to measure an economy’s competitiveness, the problem comes up of asking oneself if inflation may have been compensated for by a faster rise in productivity than the neighbors’. An index of productivity can be established. We can notice, then, that if France, Germany and Portugal have known very similar gains in productivity, this is not the case for Italy and Belgium, who are dragging behind. However, a « Monetary Union, » such as the Eurozone, should bring about a harmonisation of the levels and increases in productivity.

Chart 3

A-Gr3 Prod

Source OECD, Calculations CEMI-EHESS

One will also notice that the very important gains in productivity before 2008 in Greece have been broken by the policies of austerity put into place in order to control the sovereign debt. The gains are very high in Slovenia and in Slovakia, but this was normal considering the level they were at at the beginning.

One can therefore calculate, dynamically, the evolution of inflation as well as the costs of labor in relation to productivity. Considering inflation, one can see that heterogeneousness within the Eurozone tends to increase. Some countries, combining a high inflation and weak gains in productivity, are particularly affected, such as Spain, Italy or Belgium. The case of Greece appears in its full tragedy, as one can see that the original inflation level was perfectly controllable by means of the gains in productivity, but the drop in productivity (in negative variations) after 2009 brings with it a violent explosion in inflation when corrected by productivity.

Chart 4

 A-Gr4 Infla et Prod

Source OECD and IMF, calculations by CEMI-EHESS

This shows the strong deterioration of the situation of competitiveness in these countries, which will compel pressure to be exerted on the nominal  values of wages and social benefits. This is only possible if one enters into a logic of deflation as is the case in Spain (where prices are falling) and in Italy. But this logic of deflation is catastrophic for economic activity. When we now look at the evolution of labor costs corrected by productivity, we can see very different logics of adjustments appearing within the Eurozone.

Chart 5

A-Gr5 CduT et Prod

Data Eurostat and OECD, calculations by CEMI-EHESS

So that Germany and Slovenia end up with markedly lower costs than average, through a combination of nominal costs which have been held back relatively well, of a strong increase in productivity and a relatively weak inflation. Ireland and Spain manage to better their position at the end of the period, but this is largely due to a nominal adjustment downward of wages and social benefits, which have been peremptorily reduced in these two countries.  Portugal, Spain and Italy, despite considerable efforts, do not manage to control their labor costs well. This implies that the amelioration registered in Spain and Portugal will be short-lived and that we must expect new economic problems, and problems on the debt front, in 2015. Likewise, Greece has imposed on its workers conditions which are probably beyond enduring. But the betterment registered in 2011 and 2012 has been practically annulled by the evolution in 2013. In Greece, too, we must expect, probably as early as the coming winter, very deep economic problems which could combine with political problems.

All in all, we can assess that there is still no harmonisation within the Eurozone, if we except the case of Slovenia. This, combined with serious problems at the level of the banks (non-performing credits continue to increase considerably in Spain and Italy) should translate into new problems about the sovereign debt. Mario Draghi having reached the end of his options at the European Central Bank, all the elements are falling in place for a convergence of crises on the horizon of 2015.


Jacques Sapir

Ses travaux de chercheur se sont orientés dans trois dimensions, l’étude de l’économie russe et de la transition, l’analyse des crises financières et des recherches théoriques sur les institutions économiques et les interactions entre les comportements individuels. Il a poursuivi ses recherches à partir de 2000 sur les interactions entre les régimes de change, la structuration des systèmes financiers et les instabilités macroéconomiques. Depuis 2007 il s'est impliqué dans l’analyse de la crise financière actuelle, et en particulier dans la crise de la zone Euro.