Category Archives: A Fistful of Euros

Lisää palkkojen alennuksesta

Eurostatilta tuli tämä tiedote ‘Volume of retail trade down by 1.2% in euro area’ – ja sellaista olin halunnut esittää tämän yhteydessä mutta Suomesta, Saksasta ja Espanjasta – sen takia että haluan näyttää kuinka isot ovat eri maiden erot. Nyt tiedän ainakin mitä aikasarjaa kannattaa näyttää, se, mikä näyttää parhaiten kulutusta yhdessä maassa. Eli tässä, kuten tiedotteessa vuodesta 2003:

Index of  Deflated Total Retail Turnover

Kuten on selvä, Espanjassa asiat eivät menneet kovin hyvin vuodesta 2007 ja Saksassa ei juurikaan ollut muutoksia, mitä ehkä viittää edelleen siihen, että on tasaista kysyntää. Mutta Suomessa on jopa viime aikoina ollut vielä kasvua. Nämä ovat määräindeksit, joten puhumme oikeasti kulutksen kasvusta (vähittäiskaupassa ainakin!). Jos nyt ruvetaan alentamaan palkkoja, tämä positiivinen (ainakin taloustieteissä) indikkaattori saattaisi myös kääntää miinukseen. Toisin sanoin, siitä huolimatta mitä on tapahtunut teollisuuden kilpailukykyyn, sitä ei (vielä) nähdä vähittäiskaupan myynnissä (jos mitataan määrät).

Jos katsotaan tämän hetken kauppataseen, sitten pitää olla iloisia, että ainakin kulutus vielä vetää:

Germany and Finland

Germany and Finland

Kuten on monilla jo havaittu ongelmana, Saksalla on jättimäinen reilun viiden prosentin (BKT:sta!) ylijäämä kauppataseessa. Suomella oli vielä isompi plussa, mutta vuodesta 2009 Saksan ja Suomen tiet menivät eri suuntiin. Suomi on näiden tilastojen mukaan kauppataseen alijäämässä.

Suomelle voisi tulla kovat paikat kyllä, mutta kuten on kerrottu, tämä on enemmän teollisuuden kuin palveluiden ongelma, koska palveluiden vienti on paljon vaikeampi (ja niitä kulutetaan kotimaassa). Kauppataseen alijäämä edustaa ehkä lähinnä teollisuuden kilpailukykyä – tai sen puute. Mutta nimenomaan siellä palkkojen alenemista tuskin auttaa mihinkään.

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Spanish nightmares without a chance of waking up soon

Thanks, Edward Hugh, for doing again a great job of spreading bad news. And I meant that, in the sense that the European policy elite should soon come to its senses. Stuff is going horribly wrong, says Edward:

So there we have it. What we have is a country where not only are people of working age leaving in growing numbers, whole regions may want to go. A country where deficit numbers have been flouted time and again while bank interventions have been consistently implemented using the principle of always try to do too little too late. The country suffers from what the ECB calls deep competitiveness problems, yet there is not a single proposal on the table at present which would do anything substantial to correct this.

The pension system is spiraling quickly into a substantial structural imbalance, yet the government will hear nothing of any deep long-lasting pension reform. I could go on and on. I would like to be optimistic, but five years of watching this train crash in slow motion have left me with the feeling that this one now has no solution. The country’s political leaders just aren’t up to the levels of complexity involved (see this excellent summary of some of the “matters arising” in this regard from César Molinas here, and Europe’s leader not only drag their feet, they stick their heads in the sand at the same time. The exact details of how and when escape me, but this situation now has all the hallmarks of ending up in the same way as that legendary Rosario whose untimely demise gave the title to this post.

What kind of world are ‘we’ creating? What will be left?

UPDATED: Greece, Eurocrisis and the on-going discourse of pain – Jutta Urpilainen edition

A few days ago, Jutta Urpilainen stated (in Finnish) that ‘the passionate budget cutters have crawled back in their holes’. She states that it is good that the Finnish government has agreed that ‘adaptive policy’ should be 50% cuts and 50% tax increases. Also she is proud of the Finnish contribution to the Eurocrisis-debate – ‘Finland has been the toughest.’

It is not clear to me if she prefers this 50-50 rule for distressed Eurozone members as well. Finland has been tough with Portugal, Greece and Spain (collateral for support for bailouts). If I have time I will try to find the answers the goverment gave to these questions. But it seems that the answer broadly speaking was ‘Trust us, we know what we are doing and there are no credible alternatives.’

So I don’t know what is the current state of Finnish official thought on the Eurocrisis is – there is curiously little news in the web!

Via the NY Times:

Finance ministers had been seen as likely to give tentative approval for the next tranche on Tuesday though the money is unlikely to be disbursed before December and a deal on debt reduction may require further talks.

Urpilainen repeated that Finland was ready to give Greece more time to reach its financing programme targets but said a restructuring of its debt was out of the question.

Who is she fooling? Who are the Germans, Dutch and Finnish governments fooling, and the ECB?

Yes – Greece should never have been in the eurozone, but neither should probably Italy have been. In the video in this post Yanis Varoufakis explains how Greece cheated itself into the eurozone – by imitating Italy. And seen from the other end, why is the goal for Greece a debt-to-GDP ratio of 120%? Because Italy has been there, and trying to set a stricter standard would cast doubts on Italy as well (and quite possibly, Belgium, although I haven’t seen much news on that country recently).

But why do European finance ministers insist on doubling down on the failed austerity policy? The IMF has by now admitted that the multipliers for the effects of contractionary fiscal policy are far greater than assumed, and there is no way austerity is going to a) reduce the deficit in the short OR long term and b) is no way to restore growth (see e.g. this important post on Spain by Edward Hugh).

So Jutta Urpilainen wants to give Greece more time. Great. What does it matter? Greece will never achieve its goals under current policy. Giving more time is akin to trying yet another round of blood-letting while the patient actually needs nourishing food and medicine. Giving more time to Greece increases the probability that Golden Dawn will grown in all-too-sure elections. With this policy road, Greece is on its way to becoming a failed state. A friend of mine was as a trainee in the Technical University of Athens, and nobody can do any research anymore because there is simply no money for reagents and equipment. How do you expect a country to recover when it is sucked dry?

The main problem lies in the refusal for debt restructuring. Urpilainen and other ‘strict’ masters of European finance still refuse to acknowledge that it is as much the fault of the banks who borrowed money to Greece (and Portugal, Spain) and caused bubbles to inflate, inflation to rise and wages to become uncompetitive relative to Germany. Where is the rule that when investing/borrowing money, you should assess the risk? Where have the German, Dutch and Finnish risk assessors been? The periphery did not suddenly become financially safe because they had the euro or the ECB set the interest rates!

The continuing refusal of debt restructuring will sooner or later spell the end for Greece in the Euro. Either through changes in politics in Greece (Golden Dawn as a major party) or simple economics there will come a sudden and expectedly unexpected default of Greece (ok, Greece has actually already defaulted once).

[UPDATE: see this transcript of the state of the Greek society]

When this moment comes, the question voters should ask their governments is:

Why did goverments cover up the bad risk assessments of banks? Germany borrowing money to Greece to buy German products is akin to a car salesman borrowing you money to buy his shiny car. This is risky and banks should have known better.

Anyway, the Urpilainen Road of Pain (Urpilaisen kipukatu, which is built also by Merkel, Rutte and Draghi) will just lead to more destruction. Greece is already a total wreck – what do you expect to still get out of it?

Oh and by the way – the new Dutch government has been scared the **** out of itself by calculations indicating that its austerity policies will affect the purchasing power of nearly all income groups up to 5 percent per year.   Given the export dependency of the Dutch economy and its totally calcified real estate market this is not a good development. Maybe they finally start to understand that austerity is just simply self-defeating?

The Eurocrisis and Finnish industrial relations

In all the turbulence of the Eurocrisis, it is useful to ponder what effects this crisis might have on the Finnish system of industrial relations. As these things go, there is a lot of speculation and a fair amount of educated guesses based on data (such as what I wrote here). But there are at least two central issues that determine the possible influence of the Eurocrisis on Finnish industrial relations.

  1. Finland is a small, open economy
  2. Germany remains the main export market for Finland

It should be no secret anymore that even the German economy is starting to sputter as a result of the Eurocrisis (see here). This is not a big surprise, as German economic growth has been for a long time based on the gigantic trade surplus with the rest of Europe, which was made possible by the ECB’s monetary policy. On this issue, even German media are catching on, finally, such as in the August edition of Cicero. The dramatic decline in growth (i.e. simply shrinkin economies) in Greece, Spain and Italy also mean that Germany can export less to those countries. Many have critized Germany for a weakness of domestic demand, and this in combination with disaster in the periphery of the Eurozone most likely means that Germany is also going to import less.

As Finland is a small open economy, changes in its export-markets can have dramatic effects. In this post I already showed the weakening trade balance for Finland. With a not at all unimaginable decline in German demand for Finnish products, it is likely that sooner rather than later this trade balance will turn into a deficit, i.e. that Finland imports more than it exports.

A decline in exports will predominantly affect the manufacturing sector, but also the IT sector comes to mind. But to focus on the manufacturing sector for the moment – although this sector does not anymore represent the largest share of workers in the economy, it is still very important in Finnish industrial relations (although this may be changing as well). Accordingin to Pohjala (2009) the greatest increases in labour productivity (as part of overall labour productivity changes) happened in the forest industries and electro-technical (and other) industries. Significant has also been the relative contribution of distribution services in overall productivity growth. Other services don’t contribut much or have shown a decrease in productivity in the period 2000-2007. Here, it may be seen that there is a large difference between manufacturing and services, where the latter are mostly consumed domestically and the former mostly consumed abroad (yes, this is a great simplification).

Edward Hugh presents a new or altered concept of international competitiveness of countries here,  which means that countries are internationally competitive if they have a large enough export sector to drive economic growth. Given the trade balance of Finland and the unit cost and productivity data, it is maybe possible to assess this issue, which will be of vital importance for Finland’s future, including its welfare state. To do this, below some charts based on Eurostat data are presented. The combination to achieve in terms of these measures is (according to Hugh) a stable Relative Labour Unit Cost curve and an increasing (labour) productivity curve. Although Hugh states that countries with a high median population age tend to be export-dependent, the Finnish median age is not presented because I could not easily find this data from Eurostat, but it can be assumed that Finland, like other European countries is experiencing a grey wave, which would mean a rising median age. In the reason presented in the alternative definition of international competitiveness, export-dependency is a fairly dangerous situation for a country that has an aging population (the reasoning being that an aging population has less demand for credit and therefor ‘hurts’ domestic demand).

Labour Productivity for Germany and Finland:

It is clear that after the 1990s economic crisis Finland could catch up quickly, and this is shown in the steeper curve for Finland. For the period since 2007 it is not clear, both Germany and Finland seem to have a similar rise in productivity as before. But Finnish productivity dropped a lot more than German.

The curves for the Real Unit Labour Curves look a bit similar, and in any case the way Hugh indicates they would preferably look: since 1995 largely stable or even falling. The jump in unit labour costs in Finland since 2007 is worrying though, since this has the potential to suddenly make the Finnish economy less competitive. In any case, the fact that the Finnish values have so clearly risen over the German values (the country’s main export market) is case for concern, as it makes Finnish products more expensive.

So, what does this all mean for Finnish industrial relations? For the export-sector, not much good. As can be seen from the trade balance figure in the older post, Finland’s export position is sputtering. This may in part be because of general lack of demand, but no doubt the rapid rise of unit labour costs and therefore the cost of Finnish products abroad. My best guess, for the moment, is that in coming negotiations the employer federations will be strongly against any kind of centralized agreement (whether or not they call it that or not, like the one recently concluded), because the needs for wage restraints (from the point of view of the employers) is much greater for export-oriented sectors than domestic (service) sectors. Thus, when the current ‘frame agreement’ expires and there are new negotiations, and if the Finnish trade balance has indeed gone negative, don’t expect similar results this time around, because in the Finnish economy there are different interests and it might be the employers who disagree more with one another over wage issues than employers and labour unions, in particular when keeping in mind the relatively high inflation in Finland.

But it all depends on what happens with the Euro. I haven’t even started considering the potential fall-out from the crisis to Finnish banks and from there to companies.

Updated – The state of Finland in the Eurocrisis

UPDATE: these graphs are already outdated, I have to see what Eurostat can give in terms of newer data. A year is a long time in economies! And maybe in particular the stuff about the housing bubble is not accurate – I have a newer post about that here.

——

Something slightly different this time. In a reaction to this news, which says that Finnish exports suffer from the eurocrisis, I would like to present some data (all from Eurostat) on how Finland has fared since around 2007. The idea came from posts like this one by Edward Hugh, most recently about Slovenia. I haven’t managed to get completely similar data graphs, but these will do.

First of all, Finland is one of the few Eurocountries left with a triple-A status, which apparently gives it some clout regarding its wished in the ongoing resolution of the crisis (recall the demands for collateral on Greece, now repeated for Spain?). The triple-A status derives ostensibly from Finland’s low government debt, which is show below since 2007.

Finnish and German Government Debt

Although it is still much lower than Germany’s level, it is creeping upwards. But Finland is clearly one of the ‘good boys’.

Does the low interest rate of the ECB fuel a housing bubble in Finland? It does not appear to be so, at least for the aggregate, it is nonetheless a slowly upwards trend which has its own problems. But there might be a distinction between the capital area around Helsinki and the rest of Finland. I will try to figure that out using Eurostat data.

Also construction output is remarkably stable, not much affected by the eurocrisis. or showing signs of a bubble. One reason for this might be the pull of the Helsinki area, where there is a shortage of affordable housing.

But the low rates of the ECB may seem to lead to increasing inflation in Finland. This is in itself not so surprising at this moment, but it is part of the explanation of Finnish reluctance to go ‘all-in’ regarding interest rates, because these would lead to increasing inflationary pressure. A more detailed investigation of the various components of Eurostat’s inflation indicator will give a hint of the sources for the inflation, but I expect that these are mostly related to imported products (but that is an educated guess, will follow up).

This may also be seen in Finland’s worsening position on exporting goods:

As can be seen, this is a long term trend, although the crisis from 2007 onwards may have worsened this position. In a different graph, exports and imports to the EU show nonetheless that the balance is more positive, but barely so.

Finally, the primary balance of government budget shows that things have been slightly bad, but with the current government’s focus on getting the budget balanced, the budget deficit will probably soon disappear.

All in all, this is a very quick and dirty post about the current status of the Finnish economy- There are two things in particular that are worrying: inflation and the trade balance. The first has to do with the interest rate set by the ECB at a very low level, and the second with (presumably) declining demand in especially Germany and the rest of the world. Considering retail, domestic demand seems to be holding up quite well.

At least after the worst of the initial economic crisis, retail has recovered to its 2007 peak.

Many aspects of the economy are left outside this post, especially concerning unemployment and various export sectors, but the Finnish economy seems to be doing quite well still. It remains to be seen what happens to inflation and the balance of trade, though. For a small export-oriented economy it is not a good development that it might be importing more than it is exporting.

UPDATE:

I toyed around with Eurostat some more and I extracted more statistical information. First up is GDP per head, which does look good still for Finland:

Source: Eurostat

Two things do stand out however: the financial crisis in the early 1990s was indeed very severe and not unlike the present one (a lot could be learned from how Finland and Sweden dealt with their banking crises). Second, although the path of growth has been resumed it nonetheless looks like the Finnish economy is performing under its full potential (if we’d extrapolate the trend from pre-2007, it is clear the current growth track is at a lower level). But not bad at all.

Unemployment then. Finland has a union-managed system of unemployment funds, which means there is a large incentive to belong to a union (you get up to 500 days of a certain percentage of your last salary, more or less). This does not affect the level of unemployment, but it does reduces the human suffering.

Source: Eurostat

As can be seen, in the early 1990s the unemployment rate reached very high levels, not unlike what is seen in Spain or Greece (although those are worse in the present time). But although the unemployment rate has dropped since then, it is still quite high and seems to have stabilized around 7-8 %. Furthermore, the present crisis has again sent the rate upwards, at least temporarily. Behind this relatively high unemployment rate lies a complex story of economic restructuring which has to be told elsewhere, but basically it is from manufacturing to high-tech services (think Nokia, F-Secure). This has led to a large proportion of long-term unemployed, that is unable to find work since their jobs don’t exist anymore.

Source: Eurostat

This graph, which also shows the seasonal variation, shows that in Finland, even nowadays some 20% of unemployment is long-term unemployment. This is a potential problem in terms of the welfare-state but also politically, because these people are not so likely to have confidence in the current political parties, which, after all, haven’t managed to create policies that get them back to work.