Why the Stability and Growth Pact does not work

Till van Treeck

The current crisis of the Eurozone clearly shows that the European Stability and Growth Pact (SGP) does not work. A European “rescue plan” was finally agreed upon by the member states on May 9th 2010 after a long period of hesitation, especially in Germany. It has, for the time being, prevented the breakdown of the monetary union, as it could potentially grant up to €750 billion of credit to Euro countries with financing problems. But this rescue plan has merely bought time. The structural flaws of the SGP are still to be addressed.

The main problem with the SGP is that it focuses on the financial position of only one sector of the economy, namely the state. According to the SGP, no state should ever run a government deficit of more than 3% of GDP, with the further stipulation being a balanced budget over the medium term. Moreover, public debt shall not exceed 60% of GDP. The only legally binding constraint for any government is the excessive deficit procedure which will set in as the government deficit exceeds 3% of GDP. The two other important sectors of the economy, that is, the private and the foreign sectors, are ignored by the SGP.

Yet, it simply does not make sense to argue that a higher than 3% government deficit is unsustainable without looking at the financial balances of the private and foreign sectors of the economy. Remember that the financial balances of the three sectors necessarily sum to zero. This means that when one sector is running a deficit, then the remaining two sectors of the economy are running a joint surplus of exactly the same magnitude. If, for instance, the state runs a deficit of 2% of GDP and the private sector (households and companies combined) has a deficit of 10%, then the current account deficit of this country will be 12% (the financial balance of the rest of the world vis-à-vis this country will be 12%). Yet, such a scenario, which could hardly be considered sustainable, would not give rise to any sanctions within the current framework of the SGP. If, on the other hand, the private sector has a surplus of, say, 10% of GDP but the government runs a deficit of 3.5% (implying that the country has a current account surplus of 6.5%), then the government deficit will be considered too large and the country will face sanctions as defined by the excessive deficit procedure.

These scenarios are not merely hypothetical but of concrete empirical importance, as the following examples illustrate:

• Spain has never violated the 3% criterion of the SGP between 1999 and 2007. The public debt-to-GDP ratio decreased from 62% to 36%. The government even achieved surpluses in 2005-2007 of up to 2% of GDP. At the same time, the private sector was running huge and persistent deficits of up to 12% of GDP. As an implication of this, Spain was systematically running current account deficits of up to 10% of GDP.


• In Ireland the situation was quite similar. The public debt-to-GDP ratio decreased from 49% of GDP to 25% from 1999 to 2007, and the government almost always achieved surpluses (of up to 5% of GDP). At the same time, the financial balance of the private sector was systematically negative (up to -7% of GDP).


• By contrast, in Germany the government was in deficit from 2001 to 2006, and the 3% limit was violated during 2002-2005. From 1999 to 2007, the public debt-to-GDP ratio increased from 61 to 65%. At the same time, however, the private sector was persistently running surpluses, which always exceeded the government deficit, and at times were as large as 9% of GDP. This implies that Germany was persistently running a current account surplus, which increased up to almost 8% of GDP in 2007.

What do we learn from these examples? From 1999 (the year when the Euro was introduced) to 2007 (the year before the global crisis started), it seemed that public finances were more “solid” in Spain and Ireland than in Germany. Yet, in the course of the global economic crisis and the crisis of the Eurozone more specifically, Spain and Ireland were soon counted amongst the infamous “PI(I)GS” countries which have become the focus of speculative attacks in the financial markets (Portugal, Ireland, sometimes Italy, Greece and Spain have been called the “PI(I)GS”). In fact, public debt rapidly increased in those countries as soon as the private spending and credit booms that had driven those economies before the crisis came to an end. (In Greece and Portugal both the government and (to a larger extent) the private sector had been in deficit even before the crisis.)

The important lesson to learn from the current crisis is that when the private sector financial balance is unsustainable, then the financial balance of the government will also be unsustainable, irrespective of whether it is in deficit or surplus. More specifically, the combined balance of the government and the private sector are a much better indicator of whether a country is prone to speculative attacks than merely the government deficit or the public debt. This partly explains, for instance, why Germany is considered as highly “creditworthy” by the financial markets, although public debt is much higher than in, say, Spain or Ireland and the 3% criterion of the SGP has been repeatedly violated since the introduction of the Euro. As a consequence, the focus of a new and better stability pact should be on current account imbalances.

How can we explain the large current account imbalances in the Eurozone? One important factor is the increasing divergence in unit labour costs. In a monetary union, changes in international price competitiveness can no longer be corrected through changes in nominal exchange rates. Rather, when changes in unit labour costs (which are closely related to national inflation rates) differ among member countries, then some countries persistently gain competitiveness relative to others. Now, between 1999 and 2007, unit labour costs have increased by less than 2% in Germany but by 28% to 31% in Greece, Ireland, Portugal and Spain. This means not only that all other countries have lost in terms of price competitiveness vis-à-vis Germany, but also that as a result of lower price inflation real interest rates have been higher in Germany. This contributed to the weakness of domestic demand, which was corroborated by an exceptional increase in income inequality and poverty (which depressed private consumption) and the retrenchment of the welfare state and public spending more generally (which increased precautionary personal saving and depressed the growth contribution of government expenditure). A lot of policy mistakes have certainly been made in the deficit countries as well. But a monetary union cannot survive in the longer term when its largest member country (Germany accounts for more than a quarter of the GDP of the Eurozone) hardly contributes to aggregate demand but follows an essentially neo-mercantilist growth strategy.

A new stability pact would therefore have to oblige countries with large current account deficits to take measures that reduce nominal unit labour costs growth and, in the final instance, to conduct a more restrictive fiscal policy. At the same time, when a country has an excessive current account surplus, fiscal policy needs to be more expansionary and wage moderation needs to be stopped. This is also true for the current situation, where the old SGP imposes fiscal consolidation plans on all countries simultaneously. While this implies a serious threat to growth for the Eurozone as a whole, a more sensible approach would be for the surplus countries to allow for an expansionary fiscal stance, as long as private demand remains fragile and current account imbalances remain large.

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Till van Treeck is an economist at the Macroeconomic Policy Institute (IMK) in the Hans Boeckler Foundation in Duesseldorf, Germany.

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More pay and more jobs: how Brazil got both

Paulo Eduardo de Andrade Baltar

So far, the 21st century has been good to many Brazilians. Formal employment and the minimum wage have risen, the purchasing power of those earning average pay has recovered, open unemployment has fallen, and undocumented subcontracting has been curbed. Average household incomes have risen and poverty has declined. Positive macroeconomic developments, a range of progressive government policies and improved collective bargaining outcomes have all played a part in this.[1]

Purchasing power regained

Under the two successive presidencies of Luiz Inácio Lula da Silva (“Lula”), income inequality in Brazil has shown just a small decrease, from a Gini index of 0.58 in 2002 to 0.55 in 2008. Much more significant is the marked change in the labour market configuration, which has had a very positive impact on poverty levels. From 61.4 million people in 2003, the number living in poverty dropped to 41.5 million in 2008 (a cut from 34.3% to 21.9% of the total population). Those in absolute poverty fell from 26.1 million in 2003 to 13.9 million in 2008 (from 14.6% to 7.3%).

The recovery in the purchasing power of the minimum wage has been crucial here. It really gained momentum from 2005 on, when the federal government made an explicit commitment to promoting it. Between 2003 and 2008, the minimum wage rose faster than inflation, providing workers at the base of the income pyramid with significant real gains (38.3%). The government established a policy of annual adjustment that takes account of past inflation and adds up the average GDP growth of the two previous years. There has also been an important, though smaller, increase in the real median wage. Its purchasing power rose by 23.5%.

Formalising jobs

The increase in the average growth rate of GDP over the period 2004-2008 had significant positive impacts. The labour market absorption of working age people increased and unemployment went down. At the same time, the relative weight of informal employment, self-employment and unpaid work declined. The proportion of formal employment in the whole economically active population (including the unemployed) aged 15 and above increased from 36.1% in 2004 to 40.9% in 2008. There was an especially significant increase in the formalisation of youth jobs. This is important, as formalisation brings workers within the effective scope of labour law and social security provisions. More than 95% of the formal jobs created are on open-ended contracts. However, this does not imply job security. Brazilian employers have great flexibility in hiring and firing. For example, in 2009, in the midst of the crisis, just under a million formal jobs were created within a total of 33 million employees registered in Brazil. But that was the net job creation figure. There were 15.2 million dismissals as well as 16.2 million new hires.

Recent Brazilian experience contradicts the frequent assumption that a minimum wage will lead to net job losses and inflationary pressures. Rather, it points to the importance of public regulation of the national labour market. In Brazil, employees who are formally hired cannot be paid less than the established legal minimum. But the minimum wage is also a reference point for most informal workers and many of the self-employed. And its revaluation has had a positive influence on wage negotiations, especially on setting wage floors for some occupational categories.

Income transfers

Social security provisions have been a further important means of income distribution. A non-contributory scheme brought in for rural workers has helped to put them on an equal footing with urban workers, and a Continuous Money Benefit has ensured an income for some particularly disadvantaged groups. In both cases, the benefit cannot be below the value of the minimum wage (in line with the general social security guidelines for retirement or survival benefits). But the explicit policy of revaluing the minimum wage has not worsened social security deficits, as the good performance of the economy and the expansion of formal jobs have boosted the system’s revenues. On the other hand, the increased purchasing power of the rural pensioners and other poor beneficiaries has resulted in increased disposable income within the country’s smaller communities, especially those in the long-impoverished North-East. More effective social security coverage has also indirectly helped to improve the labour market, as a guaranteed income for senior citizens enables them to stop seeking work. And it allows some dependent minors to avoid premature entry into the labour market, thus reducing the incidence of child labour.

The various conditional income transfer schemes have been grouped into one single Family Grant programme which now covers more than 11 million families. It transfers a monetary supplement to families with an insufficient income per capita to avoid situations of extreme deprivation. In return, they agree to maintain their children’s and teenagers’ school attendance, seek medical care for expectant mothers and newborn babies and withdraw their children from child labour. This programme is intended as temporary support, allowing family members some time to seek better labour market insertion. However, even during the period of economic growth and employment expansion in 2004-2008, the vast majority of the families were unable to meet the conditions for leaving the programme.

Unemployment insurance is another important safety net. Despite the employment expansion in 2004-2008, the number of people drawing unemployment benefits actually rose. This was because the greater formalisation of jobs, which increased the number of those covered by unemployment insurance, was not accompanied by a reduction in employee turnover. The increased expenditure on unemployment pay-outs also stemmed from the real increase in the minimum wage, as the minimum benefit is equal to the statutory minimum wage.

Unemployment benefits helped to maintain households’ spending power during the worst period of the economic crisis, between the end of 2008 and the beginning of 2009. The benefits have also been contributing to the promotion of decent work in Brazil, as they are payable to workers who are rescued from slave-like employment relationships, during the time it takes to reinsert them into the labour market.

The role of trade unions

Although it has seven recognised trade union centres and more than 1,600 unions, the Brazilian labour movement has been demonstrating greater unity in action in recent years. Even during the crisis of 2008-2009, a large proportion of the occupational categories managed to bargain up the purchasing power of their wages. The negotiating climate has changed significantly since 2003. Rights are no longer being bargained away in exchange for the maintenance of employment. The relaunch of Brazil’s development agenda has increasingly shifted the union focus to winning back lost rights and making broader demands – notably for a 40-hour week.

The unions’ relationship with government has also moved forward, facilitated by President Lula’s social origins and the 1988 constitutional provisions for greater policy participation by the social actors.

A real development agenda

The Brazilian labour market still faces considerable structural problems, but opportunities do exist for sustained development in the coming years. It should be characterised by a policy of economic growth, an active industrial policy, coordination of efforts to solve the infrastructural problems, respect for the environment, expansion of the public services, the linking up of production chains, investment in science and technology, and restructuring of the State. Provided employment can be generated, there is also the possibility of extending public labour regulation and social protection. Public institutions should be strengthened as a way of fighting labour market fraud. ILO Convention 158 on termination of employment should be applied in order to counter unjustified exemption mechanisms. Although Brazil ratified this Convention in 1995, it pulled out of it again in 1996. A trade union reform should be brought in, so as to increase the representativeness of the unions and secure their organising rights in the workplace. Also crucial is continuity in the policy of revaluing wages, particularly the legal minimum wage.

Brazil can and should create a development model that distributes income and dignifies citizens.

1 Baltar et al, Moving towards Decent Work. Labour in the Lula government: reflections on recent Brazilian experience, Berlin 2010.

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Paulo Eduardo de Andrade Baltar is a researcher at the Centre for Labour Economics and Trade Unionism - CESIT – in the Institute of Economics of the State University of Campinas – UNICAMP – Campinas, São Paulo, Brazil

Additonal readings

GLU Working Paper No.9: Moving towards Decent Work. Labour in the Lula government: reflections on recent Brazilian experience; May 2010; by Paulo Eduardo de Andrade Baltar, Anselmo Luís dos Santos et al

or in Portuguese

GLU Working Paper No.9: Trabalho no governo Lula: uma reflexão sobre a recente experiência brasileira; May 2010; by Paulo Eduardo de Andrade Baltar, Anselmo Luís dos Santos et al

Crisis of Distribution, not a Fiscal Crisis

Özlem Onaran

We are in a new episode of the global crisis: the struggle to distribute the costs. This crisis has been one of the outcomes of increased inequality at the expense of labour post-1980s. Lower wage share created demand deficiency; this coupled with financial deregulation reduced investments despite increasing profitability. Financial innovations and debt-led consumption seemed to offer a short-term solution, which has collapsed since 2007. The crisis was tamed via major banking rescue packages and fiscal stimuli. Now the speculators and business lobbies are relabelling it as a “sovereign debt crisis” and putting pressure on governments in a variety of countries ranging from Greece to Britain to cut spending to avoid taxes on their profits and wealth.

In Europe, the crisis laid bare the historical divergences. At the root of the problem is the neoliberal model which turned the periphery of Europe into markets for the core. The restrained policy framework - which is based on strict inflation targeting, and which lacks fiscal transfers targeting productive investments in the periphery - is the root of the divergences. The Stability and Growth Pact, as well as EU competition regulations, limited the implementation of national industrial policy. In the absence of investments to boost productivity and unable to devalue, the only option open to countries like Greece, Portugal, Ireland and Spain in the periphery of Europe was to lower wages. But this did not save them either, since Germany was engaged in a much more aggressive labour market policy. Between 2000 and 2007, unit labour costs declined by 0.2% a year in Germany while they increased by 2% in France; 2.3% in Britain; and between 3.2% and 3.7% in Italy, Spain, Ireland and Greece. In the periphery, labour costs have increased faster than in Germany due to higher inflation. However, there was still wage moderation in these countries: in the 1990s and 2000s, productivity increases exceeded changes in real wages in all western EU countries, with the gap being largest in Germany. Overall labour’s share in income declined sharply in Europe. In Germany, Italy, Spain and Portugal, real wages even declined in the 2000s. The phenomenal advantage of Germany was due to wage suppression rather than increasing productivity.

With weak domestic demand due to low wages, exports were the main source of German growth at the expense of current account deficits in the periphery of Europe. Germany is like the China of Europe with large current account surplus, high savings and low domestic demand. In the periphery, consumption led by private debt has filled the gap that low exports and high imports have created. In Greece, and to a lesser extent Portugal, fiscal deficit also increased along with the debt of the households and corporations.

This is the background of the sovereign debt crisis unleashed in Greece. Indeed, before Greece, in 2008-09 Hungary, the Baltic States and Romania were under attack. Now, together with Greece, the attention of the speculators has turned to the public debt and deficits in Portugal, Spain, Ireland and then towards the core: Italy, Britain, Belgium and even the US. The EU’s joint rescue packages with the IMF came after months of destructive dithering and speculations about Greece’s default and exit from the Euro. The European Central Bank (ECB), which acted as a lender of last resort to private banks, did not fulfill the same function in the case of the Eurozone governments until May 2010 when, ironically, the banks it saved speculated fiercely about default. The Eurozone governments are indeed protecting their own banks that are holding Greek bonds, the bulk of which are held by German and French banks.

Greece is now pushed to follow Ireland and Latvia as role models in dramatic cuts in public sector wages, pensions, spending and increases in taxes. Portugal and Spain have also subscribed to an austerity recipe. Britain’s new coalition government declared its commitment to severe cuts.

The speculators now worry that these measures are not a solution to the problems: first they think the default of Greece is inevitable given the popular resistance and the size of the debt. Second, in a schizoid way, they are worried that austerity measures will deepen the recession in not only Greece but many other rich countries, and create a double dip recession. Despite severe cuts, the budget deficit might not improve as further recession decreases tax revenues; this makes it harder to pay the debt back.

A long recession is likely without fiscal stimuli. The uncertainty about the recovery is deterring new investments and hirings. Income and job losses, insecurity, and the pressure to pay back debt is restraining consumption.

The EU’s current policies are assuming that the problem is fiscal discipline. They do not address the structural reasons behind the deficits and the “beggar-my-neighbour” policies of Germany. The austerity packages are pushing the countries into a model of chronically low internal demand based on low wages. The deflationary consequences of wage cuts may turn the problem of debt to insolvency for both private and public sectors. In the past, in Germany low domestic demand was substituted by high exports. But it is not possible to turn the whole Eurozone into a German model. Without the deficits of the periphery, the German export market will also stagnate.

Redistribution: the solution to inequality and crisis
The existing wage suppression policies hurt all working people alike. The popular view in Germany misses the fact that the German workers’ loss of wages, unemployment benefits and pension rights created part of the problem in Greece. This is a crisis of distribution and a reversal of inequality at the expense of labour is the only solution.

The governments agreeing to the cuts are avoiding taxing the beneficiaries of neoliberal policies and the main creators of the crisis. The public debt would not be there if it were not for the bank rescue packages, counter-cyclical fiscal stimuli and the loss of tax revenues. This crisis calls for a major policy restructuring, combining the solutions to inequality with long term aims of ecological sustainability:

a) A highly progressive system of taxes - coordinated at the EU level, on both income and wealth, higher corporate tax rates, inheritance tax and financial transactions tax - is the way to make those responsible pay for the crisis. A progressive income tax mechanism with the highest marginal tax rate increasing to 90% above a certain income threshold could also introduce a maximum income. Debt restructuring can be formulated via a progressive wealth tax on government bonds with the highest marginal tax rate reaching 100% for holdings above a certain amount of bonds; this would make the speculators pay the costs of the crisis.

b) There is need for a correction of the wages to reflect the productivity gains of the past. To facilitate convergence, a minimum wage should be coordinated at the EU level.

c) Higher productivity growth in poorer European countries will help to create some convergence in wages, but regional convergence should be supported by fiscal transfers and public investments in poorer regions. Furthermore, a European unemployment benefit system should be developed to redistribute from low to high unemployment regions. This requires a significant EU budget financed by EU level progressive taxes.

d) Stability and growth pact must be abolished. The ECB should become a real central bank with the ability to lend to member states.

e) Public spending should aim at full employment and sustainability via public employment in labour intensive services like education, child care, nursing homes, health, community and social services, and public investments in ecological maintenance and repair, renewable energy, public transport, insulation of the housing stock and building zero energy houses.

To maintain full employment, a substantial shortening of working time in parallel with the historical productivity growth is also required. This is also an answer to the ecological crisis: for ecological sustainability, economic growth has to be zero or low (equal to the growth of ‘environmental productivity’). For such a regime to be socially desirable it has to guarantee full employment and an equitable distribution; i.e. shorter working time and substantial redistribution via an increase in hourly wages and a decline in the profit share.

In cases of sectors that are under the threat of mass layoffs, like the auto industry, nationalisation and restructuring via a gradual transfer of labour towards new green sectors should be considered.

f) To finance long term investments, the redesign of the financial sector based on a public banking sector is urgent. Financial regulations, including capital controls, are important but not enough.

g) Public ownership is also required in critical sectors such as housing, energy, infrastructure, pension system, education and health, in which decisions cannot be left to the private profit motive. This should involve the participation of the stakeholders (the workers, consumers, regional representatives, etc.) in decision making and economy-wide coordination of important decisions for a sustainable development based on solidarity.

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Dr. Özlem Onaran is Senior Lecturer at Middlesex University, London. Her research areas include globalization, distribution, employment, investment, and crisis.

Beyond neoliberalism?

Nicolas Pons-Vignon

For the generation that came of age in the 1990s, the belief in the labour movement’s ability to inspire progressive change collapsed soon after the Berlin Wall. Not unlike the Wall, this belief had been seriously shaken during the 1970s and 1980s, which saw the rise of neoliberalism from Chile to the United Kingdom and, thanks to the Washington-based international financial institutions, to much of the developing world. Jan Breman (1995), in a biting analysis of the triumphant World Bank’s World Development Report on “Workers in an integrating world”, notes that the Bank saw “drastic restructuring in the balance of power in favour of capital” as a necessary condition for both economic growth and poverty reduction. Written at the height of the Washington Consensus, the report represented an arrogant dismissal of workers as political actors. Only if they would keep quiet, letting the invisible hand of the market decide how many shillings (3, maybe) to put in their pockets, would their lives improve.

While some economists and politicians were genuinely convinced that neoclassical economic theory could offer an alternative to the previous dominant Keynesian paradigm, it has since appeared that, behind the market fundamentalism justified “scientifically” by economists (such as those of the Public Choice School) eager to show that governments and unions were predatory self-interested agents, lay the formidable enterprise of shifting the balance of forces in society towards private business and particularly capital holders. As Harvey (2006) points out, far from being a technical choice over allocative efficiency, neoliberalism is first and foremost a political enterprise aimed at restoring the power of capital. It does so in two ways: first by shifting economic resources back to owners of capital, and second by weakening the capacity of organized labour to resist policy changes in the workplace or in public policy.

At odds with the professed neutrality of neoclassical economics, neoliberal policies have actively promoted the interests of large (often Western, in developing countries) companies by extending the realm where they could invest (through privatization and liberalization) and the conditions under which they were able to do so (repatriation of profits, low taxation and regulation)1. Such measures have been accompanied by the systematic undermining of labour’s capacity to constitute itself as a political force that could challenge these policies, as exemplified by the aggressive behaviour of Margaret Thatcher’s Government towards the miners’ strikes of the 1980s in the United Kingdom. The victory of the Conservatives in this country paved the way for far-reaching deregulation of the labour market, which resulted in widespread precariousness for working people. This not only made life harder but also undermined the strength of unions, since the number of workers employed in permanent contracts started dropping rapidly. In light of these facts, it remains a puzzling reality that in most developed countries critical views did not catch the imagination of people and that majorities repeatedly voted for minority interests. The result of these policies has thus been a massive skewing of income towards the very rich, with remarkably little resistance in the process. The extent of this growing inequality in the United States can be strikingly observed in the long-term evolution of the income share of the top 1 per cent (figure 1)2.

Figure 1: United States: Income share of the top 1 per cent, 1913–2006

Notes: [1] = including realized capital gains; and [2] = excluding capital gains. Three-year moving averages.
Source: Palma, 2009.
 

For many years, neoliberal policies have undermined the living conditions of workers, from Chile to the United States and Africa, and with a possibly greater impact than anywhere else in former communist countries. The current crisis confirms what many heterodox economists have been arguing for many years, namely that neoliberal policies are not only bad for workers, but also for growth and development. Amsden (2010) thus points out the paradox of their continued dominance in the face of a proven inability to generate higher growth than the policies they replaced: per capita growth performances have been superior in the period 1950–80 than in the period 1980–2000 everywhere but in South Asia and in the United States. In the latter, as has been discussed above, growing inequality has meant that growth has disproportionately benefited the richest, with the “bottom 90 per cent” of earners in the United States having actually experienced stagnation between 1971 and 2005 (Palma, 2009). Moreover, China and India, two countries which seem to be steadily emerging despite the crisis, have adopted development policies markedly different from those recommended by the Washington Consensus, even if their labour policies have been more aligned with it. And the current economic crisis offers convincing evidence that the growth path of the leading neoliberal countries was premised on very shaky foundations.

Depleted growth, stagnating income for workers and their families in many countries, and at the same time a massive enrichment of the wealthiest, in particular capital owners in the West: the outcome of neoliberal policies is such that its continued dominance can indeed be astonishing. The collapse of the Soviet bloc and the deep disillusion with state-managed planned economies has certainly played an important part in the difficulties experienced by the labour movement to resist and propose an alternative to neoliberal globalization. This was particularly clear in the case of South Africa, where the fall of the apartheid regime, achieved largely through worker mobilization, took place in an environment where the international and internal pressures to follow the neoliberal trend proved too strong to resist for the new leadership.

Despite several crises related to burst “bubbles” of over-valued assets, it is only with the current crisis that a consensus – claiming unlikely allies such as Alan Greenspan – is emerging to argue that the entire finance-driven system of accumulation is in need of regulatory reform. However, while growing numbers recognize its deep flaws, many still favour superficial changes in line with Guiseppe Tomasi di Lampedusa’s ultimate advice for the continuity of power in a time of crisis: “everything must change so that everything can stay the same”. While finance has been a locus of incredible accumulation over the last 25 years, it must be emphasized that this cannot be reduced to harmless speculation. At the core of finance, of its inflated assets and their over-inflated derivatives, lies the way in which neoliberal capitalism has been able to supplement the loss of demand linked to the depleted incomes of working people by trapping them in ownership of expensive yet worthless homes (or other goods) through credit. Indeed, it is thanks to credit that demand levels have been maintained for so many years; the fact that this credit growth was entirely linked to self-fulfilling fantasies regarding asset values signals an irrationality which ridicules the claims to science often heard in mainstream economics departments. Moreover, the hardships many average informal and formal workers and their families are suffering in the crisis has shed a particularly crude light on the readiness of states to invest hitherto unavailable billions of dollars in bailouts, which have often not even been used to re-assert control over the banking system.

This book and the Global Labour Column hope to make an important and engaged contribution to the public debate on some of the issues discussed above, but also to stimulate an exchange of ideas contributing to the rebuilding of the union movement. Moving towards more inclusive and more equal societies requires stronger unions and a broad-based movement for change. The column offers a unique meeting point to progressive academics, from universities, trade unions and international organizations, and activists and trade union leaders. The title of the book – Don’t waste the crisis – is meant to emphasize that, if one good thing can come out of this crisis, it is to reopen debate on the direction of economic policy and on how people are employed. Now that the claim that worker-adverse policies were “good for growth” has been dismissed, it is essential to join forces for a new economic dispensation, which will ensure economic development with decent job opportunities. It is time to question the central policies of neoliberalism and their assumptions, such as the “requirement” for the state and social security systems to spend less. Union members are among the first victims of state spending cuts. Challenging such policies requires economic strategies and political mobilization that are focused on quality jobs, fair wages, comprehensive public services, political as well as industrial democracy and long-term social and environmental sustainability, rather than on the narrow interests of a financially affluent minority. But it is also time to discuss, honestly and in a constructive manner, the shortcomings of trade unions when they have sometimes failed to defend the weakest workers; and to propose ways in which unions can be inclusive and at the forefront of social and economic progress.

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1 Harvey (ibid.) shows how the very first series of measures adopted by Paul Bremer in Iraq in 2003 all revolved around the opening of the Iraqi economy to US corporate investment, while “[t]he right to unionize and strike … were strictly circumscribed” (p. 10). One can appreciate the sense of priorities that inhabited the US Government in the immediate aftermath of a war waged in the name of freedom, when much of the country’s critical infrastructure had been destroyed by bombs.
2 Gabriel Palma, the source of this graph, argues that neo-liberalism is the art of achieving such “redistribution” in a democracy.

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Nicolas Pons-Vignon is the editor of the Global labour Column and a Senior Research Fellow with the Corporate Strategy and Industrial Development (CSID) research programme, University of the Witwatersrand, South Africa. He is also the founder and director of the African Programme for Rethinking Development Economics (APORDE).

References:
Amsden, A. 2010. “Say’s Law, poverty persistence, and employment neglect”, in Journal of Human Development and Capabilities, Vol. 11, No. 1 pp.57–66.

Breman, J. 1995. “Labour, get lost: A late-capitalist manifesto”, in Economic and Political Weekly, 16 Sep.pp. 2294–2300.

Harvey, D. 2006. “Neo-liberalism and the restoration of class power”, in Spaces of global capitalism (London,Verso).

Palma, J.G. 2009. “The revenge of the market on the rentiers: Why neo-liberal reports of the end of history turned out to be premature”, in Cambridge Journal of Economics, Vol. 33, No. 4 pp. 829–869.