Tag Archives: Export-dependency

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?

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Non-creative destruction: Stora Enso plans to reduce its personnel by 520 persons in Europe

Here’s a question: if you operate a business in a difficult market, what should you do?
Stora Enso thinks it should reduce its personnel to increase profitability.

Read that again.
How do companies manage to stay ahead of the curve? Yes, cost containment is one part of the equality. But to stay afloat, innovation is needed. Perhaps both process-innovation and product-innovation. Look at Lada – no innovation of either kind, and it fell way behind the curve. Not even the influx of Western capital (investment, innovation, get it?) could help. Or look at Microsoft – it had working processes and a market advantage for its software, but with the advent of smartphones and tablets a new, smaller product was needed. In the time Microsoft worked on Windows Phone, Android and Apple staked out significant claims for their operating systems.
Making paper is  very capital-intensive, but that doesn’t make labour less important. There are at least two reasons why Stora Enso’s decision is a stupid strategy (besides that it is a general strategy of Finnish forest companies by now).

  1. Labour is not simply a cost, as the CEOs of the Finnish paper companies seem to think – employees have intense knowledge about work processes and machinery. Instead of ignoring skills and knowledge, companies could acknowledge the incredible advantage they would have from updating machines instead of reducing the workforce.
  2. Labour is not nearly the biggest cost for the Finnish paper industry. Raw materials, energy and transport are much more significant.

Furthermore, a reduced labour force again increases the pressure on employees to do their duty. The Finnish paper industry does not have a very great record in terms of workers’ well-being, so increases in the workload do not sound like a great development. Even if individual workers may benefit in salary terms from a more diversified job, this is a meagre consolation if one’s health suffers as a result.

 

The markt for paper in Europe is in decline, and there is still over-capacity, which hinders profitability. But European over-capacity is to some extent the fault of the Finnish paper companies themselves, which used European aid to make new investments. These units have often both greater production capacities and newer technology, which makes them more valuable in accounting terms AND relative to competitors (see this post). The core problem for the Finnish paper companies is that the European market is in decline. Finland’s location (with resulting transport costs) and reduced value of raw materials (pine, spruce, birch relative to eucalyptus) do not amend this situation.

 

Reducing its personnel is destruction, not creative destruction which is the process by which the ‘old’ is replaced by the ‘new’. If Stora Enso is serious about improving profitability, it should come up with innovative products, investments which reduce the relative cost of Finnish raw materials for paper production and preferably in this way also increasing its energy self-sufficiency by using more biofuels for its energy needs. If Stora Enso has no such plans but instead continues to reduce its workforce, then it is clear that the company does not have a serious commitment to continue operations in Finland.

 

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.