Heiner Flassbeck — The Heart of the Euro Problem: A Response to INET's Rob Johnson

A currency union at its core is about harmonization of inflation rates as all countries give up national monetary policies and explicitly agree on a common inflation target (close to under two percent in the EMU). From here the argument is absolutely straightforward.

First, we have very strong evidence that inflation rates are highly correlated with unit labour costs (ULC, for the overall economy, of course, not for industry). Second, we know in general that the development of ULC is much more the result of exogenous factors than the development of price changes, which leads to the conclusion that ULC growth determines inflation to a very large extent. Third, we know specifically (or should know) that the biggest country in Europe, Germany, even before the official start of EMU, had decided to dramatically change the course of its wage policy.

In a tripartite agreement in 1999 government and negotiating partners on the labour market agreednot to allow growth of nominal wages along the lines of productivity growth and the inflation target of two percent (hitherto the traditional German approach) for the future but to remain clearly below that line. This has being applied and has been enforced by the “flexibilization of the labour market” in the first years of the Red-Green government. This implied that German ULC growth and its inflation rate would systematically remain below the commonly agreed inflation target in EMU.

As no other country had a similar arrangement it implied also that over time huge discrepancies in inflation rates and huge real appreciations of other countries (against those like Southern Europe that would slightly overshoot the inflation target but even against those like France that would strictly stick to the target) and huge unsustainable imbalances would be the result. One big country permanently gaining international market shares and increasing its surpluses and the others permanently losing and going deeper into deficit is a scenario for collapse if corrective forces do not come into play sooner or later.

INET
The Heart of the Euro Problem: A Response to INET's Rob Johnson
Heiner Flassbeck, August 8, 2012

"The interesting political question in this country is whether or not there's any wage floor which is too low."

Corporate profits are higher than ever, but for many workers, things just keep getting worse.

Take the situation unfolding at Caterpillar Inc.'s London, Ontario plant. The company, the world's largest heavy machinery manufacturer, is insisting that Canadian workers take a 50 percent pay cut, give up their current pension plan and swallow a significant reduction in benefits. On Jan. 1, Caterpillar locked out the plant's 465 workers, refusing to let them do their jobs until they make these sacrifices.

The moves are familiar to anyone who's watched the auto industry struggle with its workers and union over the past several decades. But Caterpillar, unlike the automakers, hasn't suffered much economically. Indeed the company has long stood out for its profitability, in the last five years hovering above the top 13th percentile on the Fortune 500 list. In the last three months of 2011, as Caterpillar was pressing Canadian workers to give in to its requests, the company reported a 44 percent surge in profits from the previous year. Now, if workers continue to resist, Caterpillar appears to be threatening to take their jobs out of the country. Not to China or Mexico, but just over the border to Muncie, Ind., where desperate Americans are eager to take any job -- no matter how low the pay.

"In the small picture, Caterpillar is a really hard employer, but the big picture here is obviously the race to the bottom," said Linda Kaboolian, a lecturer in Public Policy at Harvard, who studies workplace issues and has closely tracked the company's practices through the decades.

"The interesting political question in this country is whether or not there's any wage floor which is too low," she said. [emphasis added]

Read the rest at The Huffington Post
Caterpillar Inc. Sees Surging Profits, Amid Pay Cuts And Rumors Of Plant Closures

by Lila Shapiro

 Pretty clear where this is headed. Business is refusing margin compression and demanding that workers take wage cuts to maintain prices and profit margins. That means growing inequality, resulting in increasing social unrest and political turmoil.