Tag Archives: Spain

Worrisome if this analysis is correct!

A Simple Chart Illustrating Why Japan Style Deflation Is Now More Or Less Inevitable In Spain http://feedly.com/e/xZUifhy8

Olli Rehn is not liked in Spain – neither are the ECB, IMF and European Commission

This is a very bitter-sounding writing by a distinguished Spanish professor. It’s main lesson is that the problems in the Eurozone are not in the labour market; with the exception of Greece perhaps, labour market rigidities have not caused unemployment. To quote:

In other words, it is assumed that unemployment is lower in the US because it is easier to fire workers in the US than in the EU (including Spain). If that was the case, then how can it be explained that US unemployment was higher than the average of countries that later on became the EU-15 for the majority of years in the post-World War II period, even as the US labor market was already more ‘flexible’ than those of the countries that would eventually form the EU-15? In fact, unemployment in the EU only started to overtake the US unemployment rate when preparations to establish the Euro were underway, as the governing institutions of the Euro set controlling inflation as a top priority rather than job creation.

The main lesson, in particular for Olli Rehn, should be: making labour markets more ‘flexible’ (euphemism for making hiring and firing easier) is not the solution for getting the economy up to speed. In a situation of depressed demand (domestic, European and global), is it smart to make it easier to fire workers, so that they have less income to spend? Of course not. Furthermore, in the context of the euro, increasing unemployment means greater reliance on social safety nets, which shows up in increasing government debt, which currently triggers uncontrollable craving by politicians to cut the government debt.

You know, there is a reason why social safety nets are called ‘automatic stabilizers’ – they make recessions less severe and redistribute wealth when there is a boom. The current generation aims to destroy all that and go back to pre-1930s economic ‘wisdom’.

In the context of the Eurocrisis it is very hard to understand the stance of ‘Northern’ Social-Democrats, i.e. in Finland, Netherlands and Germany in particular. But it is no surprise that many people also in those countries are flocking towards populist parties on the left and right.  Let there be a lesson for those parties before it is too late.


Can Spain Achieve What Ireland And Latvia Did?

Can Spain Achieve What Ireland And Latvia Did?

‘Spain would do well to stay clear from the type of reform measures the Commission and the IMF are trying to sell to economies in distress.’

Some, especially in Finland, might find that there is a lot of critical posts regarding Olli Rehn (not as a person, as a representative of a certain set of policies). But please remember: all the talk of ‘recovery’ is extremely premature and in any case how can you call it a recovery when unemployment is so high (and rising in many places). Think of the Netherlands. Think of how things are going in Finland – not the aggregate numbers but the real-life stories of people losing their jobs.


In addition, as Simon Wren-Lewis writes, left- and right-wing extremism is surging thanks to the current politics. In the Netherlands the extreme right/populist Freedom Party as well as the extreme left Socialist Parties are surging in the polls. Also in Finland, especially now the crisis starts to bite, the political success of the True Finn party is virtually guaranteed in the next elections. This I have thought about earlier, and written on the blog here. The recent gallup by the Finnish daily shows that the opposition parties Center Party and True Finns are clearly on the rise, the former would be the biggest and the latter is as big as the National Coalition Party, which leads the current government. The Social Democratic Party is quite a lot smaller in this opinion poll that half a year ago (18,2% to 16,3%).


Don’t believe anyone that says the Eurocrisis is nearly over

Don’t believe anyone that says the Eurocrisis is nearly over

In this detailed commentary on the state of the Spanish economy, Edward Hugh mentions a number of reasons why for the Spanish economy, there is not much hope. One aspect is common through with that of a number of other European countries: a rapidly aging population and its influence on growth possibilities and the strain on welfare states hereof. Please read it all. Not optimistic, but you don’t hear this kind of stuff in the 8 o’clock news.

Labour rights and the Eurocrisis

While some feel that processes like the European Social Dialog blur important distinctions between Labour and Capital, some feel that these dialog processes are important. And although there are many critical issues to address, the Social Dialog has led to important achievements, such as the Framework Agreement on Parental Leave.

Nonetheless, the economic integration of Europe and all that this includes has been seen by many as an essentially neo-liberal project, although there have been strong forces trying to preserve the social aspects of Europe. After all, many aspects of European integration have been about liberalizing markets – whether financial, labour or for goods and services. And as I wrote last year, regarding the Proposal for Regulation on the excercise of the right to take collective action within the context of the economic freedoms of the single market – COM(2012) 130:

Regarding the scope of the concept of ‘services’ and the growing use of posted workers in a wide variety of industries, it must be considered a dubious development that there might be soon an at least two-tier labour market (in terms of labour rights): those who are employed directly enjoy the labour laws of the country where they work (on the basis of the free movement of workers) and those that are either self-employed or categorized as posted workers, through outsourcing. The latter enjoy much less legal protection and substantive labour rights than the former.

As far as I know, this proposal has not yet been formally become law, but it is nonetheless mentioned as a legislative initiative for 2012.

But those things aside, now something else is happening, parallel to the EU-level developments which probably have proceeded at their own pace.

As the EU policy elite demands, countries like Spain, Greece and Ireland are implementing austerity policies to become competitive again. Elsewhere in my blog and on the net there are many sources that show these policies are deeply wrong and simply crush the populations in those countries. It is no wonder Spanish, Irish and Latvian migration abroad has increased very much recently. But these demands for austerity also affect labour rights – which emphasises the neo-liberal heritage of the European project: labour unions make labour more expensive, so they must be dealt with. Even though this is obviously not always true, especially taken in consideration labour productivity gains and issues of worker well-being, quality of work etc, still I have now found two clear examples of attempts to somehow remove the power of labour unions to resists policies/actions that affect their members.


The first has been quite widely in the news, and rightly so. As the BBC reports here, the Greek police has broken up a strike of metro workers by force, relying on an ’emergency law’ for ‘peace-time emergencies.’ The metro workers were on strike against a scheme that would reduce their wages by up to 25%.


The second has not been reported on so far in English speaking media (at least aside from the specialized media I link to, I think), but according to this news, there is a new law in Spain which allows companies to reduce the wages of its personnel by 15% to stay competitive. At the Stora Enso paper mill in Barcelona workers went on strike, because they don’t accept these measures.


So there you have it. Two countries, two approaches to ‘enforce competitiveness.’ The Greek case uses police force to break a strike by public sector workers – a group that normally already has been late to achieve the right to strike. The Spanish case is in a way even more drastic, because it gives the employers a nation-wide blessing to cut wages without negotiation. I don’t blame the Spanish unions for being upset about this.


So what will we see next? I am waiting for similar news on Italy or Portugal. Or perhaps the Finnish business establishment will use the crisis to demand constraints to the right to strike in Finland.


RISI European Pulp and Paper Map

I finally got it! To some extent I am a very visual person, so it is great to have a map with all pulp and paper mills (as of 2011) on it. Saves me a lot of work – I only had a rough overview of Finnish-owned mills.

Some factoids:

  • I am surprised at the high density of very small mills in Northern Italy
  • There are more paper/board mills in the Netherlands than I thought
  • It is interesting to see the geographical spread of pulp mills – mostly Sweden and Finland, and then Portugal and Spain in the South. Must be the shipments of South-American pulp.

Great stuff. Shame that their other products are way out of the budget of the research community!

Why private equity take-overs should be seen as a nail in the coffin of healthy companies

What is private equity and how does it work? Moreover, why should anybody working at a firm that is taken over by an private equity firm worry?

In the economic blogs, there have been many good articles about the private equity industry, especially in relation to Mitt Romney, who somehow claims to be a job creator because he was in a private equity firm.

To quote from a good introductory article by James Kwak of The Baseline Scenario:

A private equity firm is just a rebranded version of what were called LBO (leveraged buyout shops) in the 1980s, before they got a bad name. The classic transaction is to take over a company by contributing a small amount of equity and borrowing a lot of money.

As he states later in the same article,

The discussion of the power of leverage above should have reminded you of something: the credit bubble and financial crisis. Leverage means higher expected returns, but it also means higher risk, transaction costs, and the potential for looting. […]

When it’s easy to make money just by piling on debt and paying yourself hefty “dividends” and “fees,” why go to the bother of actually making a company better? In that case, it’s simply a case of shareholders (private equity funds) taking money from creditors, with employees left as collateral damage.

In another article on the links between private equity and ‘job creation’, James Kwak has this to say:

Private equity firms, in general, are buying shares on the secondary market (this is what “taking a company private” is all about), not contributing new capital. They are not increasing the amount of cash available for investment by companies. In fact, since they make money by paying themselves special dividends, they are reducing the amount of cash available for investment. In some circumstances this may be the best thing for shareholders, but it certainly has nothing to do with job creation—especially since we know that the dividends paid back to those private equity funds are only going to be used to buy more mature companies. The goal of a private equity firm is to make its companies more profitable: sometimes that means new products and new jobs, but it can just as easily mean the opposite (eliminating unprofitable product lines and fewer jobs).

Furthermore, the great Jared Bernstein states the obvious about the relation (and risk!) between the leveraged buyouts and the health of companies:

As I stressed here, because interest on their borrowing is tax deductable, debt financing and PE are locked in a symbiotic relationship that distorts incentives and leads to levels of indebtedness that can cripple otherwise stable companies.

(Obviously, for Europe this might be different, because the interest on debts might be less tax deductible than in the US, see Naked Capitalism’s piece on that here).
So, simply put, a private equity deal is a situation where a PE firm buys another company with a little own capital and loads of borrowed money. Their business is ‘buying and selling companies, all done with the goal of earning big returns for themselves and their investors.’ It does not necessarily have anything to do with making the bought company more competitive or upgrade its operations. The only goal is profit, profit – for the PE firm and the investors.
For the paper and board industry this is a nail in the coffin. There are many profitable paper and board mills in Europe (still) but the developments of the markets are such that profit margins will shrink (except for pulp, which is still in high demand in Eastern Europe and China. But for private equity firms these paper companies are interesting investment objects, since they usually have a fairly good cash flow and their capital intensity means that the value of the companies by itself is good, which means the PE firm can borrow a lot of money against the company. But as the NewPage fiasco has shown, if there is no understanding of the industry, then in the end the PE firm will somehow walk away from the debt, while having made a lot of money nonetheless.
So when Newark announced that it would divest its European operations to Phi Industrial Acquisitions, I naturally saw this as a very negative development, especially since according to Newark those mills are in a good condition and ready for the future – this indicates that there might actually not be so many options for improving the profit margin.
And yes, theoretically speaking, in a perfect world, private equity investment would be probably good for firms. But since they apparently need huge tax breaks, I have doubts about their usefulness.