In its annual country report released on Monday, the IMF turned up the heat on France for labor reform. The Washington-based lender called for a “powering up” of Hollande’s labor reforms to tackle the “significant rigidities hinder[ing] the economy’s capacity to grow and create jobs.”
Socialist President Francois Hollande, who has suffered since inauguration the largest fall in popularity of any French President in the past 50 years, has already been under considerable pressure from a citizenry fatigued from anemic and oftentimes negative economic growth and rising unemployment since 2008. Yet he still hasn’t delivered on reviving France’s flailing job market.
That’s because he’s too focused on devising government schemes, such as giving subsidies to small businesses who hire young people and retain older workers, to avoid making real changes to business-crushing labor regulations that have come to be entitlements within French society. Hollande’s changes to these laws thus far, in an attempt to draw attention away from his inaction on structural reform, are merely cosmetic, as I point out in a February CS Monitor article.
These reforms only increase flexibility during economic downturns, and they do nothing to change the employer’s fundamental and burdensome obligations to employees.
First, firms still cannot lay off workers to improve competitiveness when the business is healthy; they can only make economic dismissals to preserve competitiveness when already in financial straits. In France, it ought to be legal to fix small problems before they become big.
Second, businesses remain obligated to assist laid-off employees in finding other jobs and in retraining them for their new positions – a distinctly French phenomenon. For businesses with more than 1,000 employees, this limbo period before dismissal can last from four to nine months.
Third, reform merely reduces the period for laid-off employees to legally challenge their dismissal from five years to two. Some progress! Not only does 1 in every 4 French employees bring a case to court, but French labor courts are the least business-friendly in Europe, with employers losing 75 percent of cases, according to the Organisation for Economic Co-operation and Development.
The agreement also increases taxes and fees for hiring workers on temporary contracts. This hits businesses hard because 8 of every 10 new hires are on these contracts, according to French Labor Ministry estimates. This was a union demand to discourage the use of temporary work, which is a competitive threat to union-protected permanent contracts.
The reforms especially harm French youth, as more than half of those employed now jump from job to job under temporary contracts, according to Eurostat. Understandably, businesses don’t want to take the risk of hiring an employee they can’t dismiss later.
France needs to increase labor flexibility, not create government programs that add needless complexity to a labor market that is already difficult to navigate for businesses. Hollande is playing a losing game of charades. It’s time for him to roll up his sleeves and deal with the difficult political battle that real reform entails.
Spain’s central bank—operating within the European country with the highest rate of unemployment—just recommended to the government in Madrid a suspension of the minimum wage in certain industries. The bank wants to remove the law from being a “barrier” to hiring lesser skilled workers.
Say again? Our more left-leaning friends across the Atlantic just admitted that the minimum wage, a price floor for labor markets, creates unemployment. This simple economic logic is often denied by economists, pundits, and politicians in the U.S., and most recently by Barack Obama in pursuing his goal to increase the minimum wage to $9 per hour.
With more than half of all Spaniards under the age of 25 currently jobless, the welcome realization that minimum wage prices low-skilled and typically young workers out of lower-paid jobs they would gladly take comes at a high price.
Germans had this epiphany too at a time when they endured unemployment above that of their European peers. That’s why the Social Democratic government of the 2000s (yes, a bunch of center-left Europeans!) began implementing a “minijobs” program in 2003—as part of a larger package of labor liberalizations—for people who wanted to work a limited number of hours per week at a competitive and tax-free wage. Though Germany does not have an official minimum wage, most full-time wages are set through industry-level collective bargaining agreements, thereby creating the same price floor as a wage law. The minijob contract is exempt from these wage conditions.
According to the The Wall Street Journal, roughly two-thirds of minijob workers hold no other job—meaning that they would otherwise be unemployed. And one in every five working Germans has a minijob. As the Euro Area reported a record-high unemployment rate of 12.2 percent in April, German unemployment remained among the lowest in Europe, at 5.4 percent, and youth unemployment was similarly low, at 7.5 percent.
Labor flexibility creates jobs. Blanket regulation requiring higher wages creates unemployment. Spain and Germany found this out the hard way. With unemployment still stubbornly high at 7.5 percent, let’s hope America does not.
Does austerity kill? In a recent New York Times op-ed, David Stuckler and Sanjay Basu claim that fiscal austerity leads to a worsening of health outcomes, using higher suicide and disease rates across Southern Europe as their case-in-point. But there are problems with this formulation.
First, the authors make the mistake of linking fiscal austerity with less health spending. Greece, Spain, and Italy chose to cut health spending even though there were better choices for cuts. And health spending didn’t put them into deep debt to begin with. Borrowing at cheap interest rates and spending it on pet projects and political patronage — which includes the welfare state, but not so much in health — put them in deep debt. Estonia swiftly and severely began to reduce the size of government in 2009, but it increased health spending during that period and suffered no health declines.
Second, Stuckler and Basu point to high unemployment and trimmed social services as the sources of increased depression and suicide in Southern Europe. But this is not an argument against austerity; it is an argument to make people less dependent on the social welfare system. In Southern Europe, labor markets are broken. That’s why the IMF gave each country a failing grade in labor market efficiency in 2010. In Italy, it’s illegal to fire employees for poor performance and difficult to dismiss them for outright negligence. Layoffs also are a long and expensive process. So,when recession comes, employers can’t hire at lower wages and don’t want to hire because of these factors — which makes matters even worse. Droves of Italians and Spaniards wouldn’t be dependent upon state welfare today if labor markets were more flexible. That’s why austerity should regard not just cutting spending and revenues, but also shrinking the regulatory state. Job protections, a hidden cost of the welfare state, are the real killer.
The narrative with which the authors open their op-ed—in which an older Italian family commits suicide because Italy’s increasing the pension eligibility age forced the main breadwinner back into a workforce with meager opportunities—tells us to abandon not austerity but the level of commitment to current welfare-state policies. If businesses had more flexibility to hire and fire workers, if the implicit tax rate on labor wasn’t the highest in all of Europe, and if Italy’s court system was more efficient in resolving labor disputes, this family wouldn’t have been so reliant on receiving a state pension in the first place. Finding work would not have been such a hopeless proposition that it ended in such tragedy.
Third, the authors bring up Estonia’s experience with poor health outcomes during its transition from communism but conveniently fail to mention its success with real austerity from 2009 to the present. After making deep cuts to both spending and revenues beginning in January 2009 (unlike any other country in the Euro Area), Estonia experienced positive economic growth by the third quarter of that year — more than 2 percent growth in 2010, and 7.6 percent growth in 2011. Unemployment began to decrease by the sixth quarter after austerity and is now below the Euro Area average. And most importantly to Stuckler and Basu, neither the change in the rate of suicides nor the change in the total death rate were statistically significant relative to Estonia’s previous 10 years. See my in-depth statistical report for more information: http://cei.org/web-memo/separating-european-austerity-fact-and-fiction.
Painting austerity as the grim reaper is more than a stretch. “Austerity” need not mean a reduction in health spending. And focusing on the short-term effects of trimming the welfare state ignores the long-term causes behind why some citizens’ lives depended so heavily upon it. Does austerity “kill”? It doesn’t have to.
Don’t let the optimism surrounding last month’s job numbers fool you. The unemployment rate’s decline from 7.6 percent in March to 7.5 percent in April is more statistical artifact than progress. Like that of our Western European neighbors—and the U.K. in particular—the U.S. economy is stuck in a rut. Why? The answer is simple. Government profligacy overburdens the economy while propping up private inefficiencies, as I explain in Investors Business Daily.
Since 2008, Washington policymakers have been pacing around the doctor’s office too afraid to take the bitter but effective pill America needs: slash federal spending and end the U.S. Fed’s life support for zombie banks.
Economically stagnant Britain shows us where this continued procrastination leads. Instead of dashing after our tea-drinking transatlantic neighbors, American policymakers should look to Estonia, which took its austerity meds and quickly returned to prosperity.
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Although gold traditionally has been the alternative asset for those wary of fiat currency debasement, there is an emerging newcomer: virtual currency. Bitcoin, created in 2009 by Japanese developer Satoshi Nakamoto, is a self-regulated and anonymous online payment system with a fixed supply of currency.
The selling point of Bitcoins (BTCs) is their value cannot be artificially debased. Although the supply of BTCs will increase predictably in number though 2017 (the currency is still developing and needs to circulate enough BTCs to support its later ambitions), the limit is fixed at 21 million BTCs. After 2017, the increases are small half-steps towards the 21 million BTC target.
There is no central bank, operating under the influence of government, to manipulate the currency for political ends.
That said, Bitcoin still has a long way to go before becoming a real alternative to the fiat currency we use everyday. There are only a handful of merchants that accept BTCs directly, hackers present a real danger to your “virtual wallet” — and since the Bitcoin is peer-to-peer and completely anonymous (each transaction has a randomly generated, thereby untraceable, key code) — finding the perpetrators is essentially impossible. Also, volatile trading volumes while the currency is still in its infancy can pose serious exchange rate risk to users.
The Finns don’t seem to mind the risks though — they are the highest per capita users of BTCs. Americans and Germans are the largest volume users.
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American financial regulators could take a lesson from their European counterparts. The recent EU bail-in/bailout of Cyprus, despite its dangers, shows that reducing moral hazard in the banking industry without provoking bank runs is possible.
As I write in Forbes, Cyprus is one of the most insolvent Euro member states.
Non-performing loans [in Cyprus] (NPLs) are 15.5 percent of gross loans, which is comparable to Italy (13 percent), Ireland (19 percent), and even Greece (21 percent). But the real problem is Cyprus’s staggering inability to absorb losses. NPLs account for an enormous 264 percent of tier 1 capital—a level so high that not even basket case Greece, at 217 percent, can compare.
Cyprus got this way because of the risky actions of its banks, which were heavily invested in Greek debt. Once Greece hit the wall, so did the Cypriot banking system.
Unlike larger countries like France, Italy, and Spain, the little Mediterranean island’s fate does not have great effects upon the Euro in purely economic terms. But its precedent matters because markets extrapolate future EU actions (for example, what the EU will do when larger economies come under financial scrutiny) from present ones. Accordingly, Cyprus represented a low-stakes means through which to change expectations for the future. In February, before the drama and media hype surrounding Cyprus began, I wrote about this opportunity in the Global Post.
Europe should think twice before simply handing out a bailout package equal to the entire Cypriot economy.
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As Ireland’s current plight shows, burdening the taxpayers to save the banks and bondholders imposes unnecessary and long-lasting pain. Once the European Union provides the stabilization funding needed to prevent Cypriot contagion to the rest of the euro zone, the EU ought to set a new precedent going forward: that inefficiency has the freedom to fail.
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Monetary policy is inherently redistributive. And as I explained in a January article in Forbes, monetary expansion helps Wall Street at the expense of Main Street.
But let’s put the theory to a brief test. Using U.S. data from 1959-2012, I investigated the relationship between changes in the monetary base and changes in employment levels for finance and manufacturing — representing the health of the finance industry and the real economy, respectively.
A simple regression (controlling for other monetary variables such as the federal funds rate and the prime bank rate) showed that each 1 percent increase in the monetary base was associated with a 0.4 percent increase in financial sector employment and a 0.03 percent decrease in manufacturing employment. For the statisticians out there, these results were statistically significant at the 1 percent level.
Of course, this rather simple least squares regression is by no means conclusive. But it sheds some empirical light on an important topic not often discussed in modern debate on monetary policy: the redistributive nature of the printing press.
In a January National Review article, I explained how Baltic countries such as Estonia that had undertaken short-lived but severe cuts to government spending and revenues — what I termed “real austerity” — had been outperforming West European countries that had been increasing both spending and taxes then speciously claimed “savage” cuts had taken place — what I termed “phony austerity” — for the past three years.
But a relevant question for the economically troubled European countries and U.S. remained: Were such painful-but-temporary measures in the Baltics worth their economic cost? The answer is an emphatic “Yes!”
By 2012, Estonia’s cumulative increase in GDP since 2008 (even after implementing austerity in 2009-2010) was greater than that of the Euro area average and of the frequent punching bag of the anti-austerity crowd: the U.K. By 2014, estimates indicate Estonia will have overtaken Germany in terms of GDP gained since 2008.
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Europe, which has been enjoying a recent respite from financial chaos, is about to get a rude awakening: Italian elections. Voters will go to the polls this Sunday through Monday, and the winner will soon upset the Eurocrat and financial calm that has surrounded Italy since Mario Monti’s caretaker government took office in November 2011. In the months following this weekend’s election results, financial markets will increasingly expect progress on reform of Europe’s third-largest economy. But Rome will be unwilling to deliver.
That’s because the almost certain winner, a centre-left coalition led by the Democratic Party is resistant to the kinds of reform that Italy badly needs. There is some hope for change, however.
Although Italy’s centre-left coalition is likely to win a majority in the House of Deputies (Italy’s lower parliamentary chamber), a clean victory in the Senate (the upper chamber) is much less probable. As a result, the centre-left group will probably coalesce with the centrist group backing former technocrat Prime Minister Monti. Despite his technocrat government’s lackluster record, Monti has at least attempted liberalizing reforms and budget consolidation. And he has set forth a new agenda pushing for more. In contrast, the Democratic Party wants to go in the opposite direction: adding more regulations to an already broken labor market and easing the drive for austerity begun under the Monti government. But a centre-left coalition that includes pro-Monti centrist parties will have to make concessions for liberal reforms and budget consolidation, or risk governmental collapse.
There’s also the specter of the populist Five Star Movement threatening to compound parliamentary logjam. Although it seems highly unlikely that it will be part of any governing coalition, current polls place the movement at receiving roughly 15 percent of the general election vote. That translates into a smaller percentage of parliamentary seats because of a special “majority bonus” going to the proportional winner in this weekend’s elections, but the movement is loud and has an enthusiastic following. Unfortunately, its economic illiteracy is rampant—with radical propositions like banning stock options.
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This week’s State of the Union address was full of plans for government action and spending to combat U.S. economic malaise. At the same time, the President claimed that there were drastic cuts to the federal budget on the way (referring to sequestration, under which spending actually continues to grow but at a slower rate). This doublespeak mirrors that of European politicians and hides reality: more government isn’t making the economy any better.
Illustrating this point is the dichotomy in economic performance between Western European countries — whose politicians claim to have made cuts but in reality have increased budgets each year since the Eurocrisis began in 2009 — and their Baltic counterparts — which underwent actual cuts in the size of government.
Eurostat just released fourth quarter 2012 data on economic growth this week, and it follows the three-year trend of Baltic over-performance relative to the rest of Europe. The Euro Zone as a whole registered dismal Q4 2012 growth of -0.6 percent while Latvia and Estonia grew by 5.7 and 3.4 percent, respectively.
As I wrote in National Review last month, there is a world of difference between austerity that leaves out the public sector while businesses suffer from recession, and austerity that forces government to tighten its belt along with the private sector. The first strategy, which I like to call “phony-austerity,” doesn’t work. The second one, which I like to call “real austerity,” does.
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