Jack Rasmus

This past week Japan re-elected its prime minister, Shinzo Abe, for an additional four years despite his previous policies having precipitated a deep recession in Japan that began this past April 2014—Japan’s 4th recession since 2008.

The central elements of Abe’s policies during his first two years in office, 2012-2014, included massive central bank money liquidity injections, first introduced in 2013, and a major sales tax hike for consumers that followed in 2014. A so-called ‘3rd arrow’ of ‘Abenomics 1.0’, proposals for structural economic reforms, was also announced in 2013 but has yet to be fully defined or implemented. That 3rd arrow of structural reforms to Japan’s economy is now at the top of the political agenda in Japan. It will be defined in the coming weeks and launched in a package of new policies in 2015—i.e. ‘Abenomics 2.0’.

‘Abenomics 2.0’ in 2015 will consist of new forms of austerity measures, contained under the cover of the softer code word of structural reforms—i.e. Abe’s former ‘3rd arrow’. Much like calls for structural reform now also occurring in Europe today in France, Italy, Spain and elsewhere, ‘structural’ refers mostly to further capitalist reordering of labor markets—i.e. ‘labor market reforms’. That means changes to how workers are paid, new ways to compress wages, limits on benefits workers will be allowed to receive, and new restrictions on unions and collective bargaining.

As Abenomics 2.0 is defined in the coming weeks and months, Japan wage earning households will therefore soon face even more austerity and even more wage and income compression. While another sales tax hike and still more QE money injections by Japan’s central bank—i.e. ‘arrows’ one and two—are still possible in 2015-16, the primary focus for 2.0 will be on structural, and especially labor market, reforms and related austerity measures.

Abenomics 1.0

Abe’s 1st arrow of liquidity injection—introduced in 2013 in the form of a ‘quantitative easing’ (QE) program—consisted of Bank of Japan direct buying of $530 billion of bonds held by private investors and bankers. Abe’s ‘2nd arrow’, a major increase in the national sales tax, raised Japan’s sales tax from 5% to a new 8% level this past April 2014.

Like all QE programs introduced to date in the USA, UK and elsewhere, Abe’s $530 billion QE produced a doubling of Japan stock prices-in the case of Japan in just one year—and a corresponding consequent surge in banks and investors’ profits and capital incomes. Japanese multinational companies also benefited as their foreign currency earnings rose in value, as a result of QE’s reducing Japan’s currency (Yen) exchange rate. The lower Yen also boosted Japan export sales for Japanese non-financial companies. The currency earnings and export sales in turn drove up stock prices and returns on financial assets still further.

In contrast, the 3% additional sales tax hike—Abe’s ‘2nd arrow’—directly reduced the real incomes of Japan wage earning households. The sales tax hike was not the only factor reducing wage earners’ real incomes. The QE money injection, by reducing Japan’s currency exchange rate, also raised the price of imports and therefore inflation for Japanese households. That inflation in turn reduced real wages and real household incomes even further, in addition to the sales tax hike. Another negative effect of QE was to divert the massive$530 billion monetary injection into mostly financial asset investment. Japanese investors, now flush with $530 billion extra in cash, invested the money injection largely in stocks, bonds, derivatives, and other financial instruments, instead of into real production in the Japan homeland economy that might otherwise have led to real investment, real jobs, and real incomes for Japanese workers. Or, alternatively, they invested a good part of the $530 billion abroad, thus also denying Japan wage earning households of any sharing of the benefits of QE.

According to the business press, Japan businesses reportedly are now sitting on $2.65 trillion in uncommitted cash. That’s equal to more than 60% of Japan’s annual GDP. In other words, Japan companies, shareholders, and investors benefited nicely from Abe’s ‘1st arrow’ of QE injections. On the other hand, they have been especially reluctant to share it in the form of wages with their workers. Real wages of Japan workers declined by 3% in 2013, in the first year of QE. They are projected for a further fall of 2%-3% this year, 2014, as well.

Given the downward pressure on wage earner incomes, consumption in Japan fell steadily throughout 2013 as QE was being introduced, except for the last three months as consumers stocked up on goods in anticipation of a coming 2014 sales tax hike. But once the sales tax was raised in April 2014, the floor collapsed on Japanese consumption spending, falling by almost 20% in just one quarter, April-June 2014.
And with that consumption collapse came the deep contraction of Japan GDP in the spring 2014 quarter, during which it fell by -7.3%. That was followed in the July-September 2014 period by another -1.9% GDP decline. Japan today finds itself mired in yet another deep recession, with no recovery light in sight at the end of the latest recession tunnel.

Abenomics 2.0: The ‘3rd Arrow’

Abenomics 2.0 promises even more of the same trends. The outlines of Abenomics 2.0 and new forms of austerity are now just beginning to emerge in Japan. Measures reportedly being considered include: major changes to Japan’s social security retirement system that will reduce benefits. That means a cut in what amounts to ‘deferred’ wages. Japan’s joining the USA led negotiations to establish a trans-pacific free trade zone, called the Transpacific Partnership (TPP), which will mean downward compression on wages as a result of free trade arrangements. Still undefined measures to increase business productivity, which almost always means jobs displaced by technology and workers working harder and longer for little or no more pay.

Following ‘labor market reform’ initiatives now emerging in Europe, Abe will also reportedly propose changes to make it easier for businesses to hire and fire full time workers. That will likely lead to an even greater shift to contingent employment, i.e. more part time and temporary job hiring as businesses lay off full time and replace with part time and temp workers. That too will also result in downward wage compression. Meanwhile, as a cover to all these real measures, Abe will continue to ‘talk’ to businesses, urging them to raise wages for their employees, even when both understand such talk is only for public consumption.

Wage compression forms of austerity will most likely also be accompanied by more traditional austerity forms as Abenomics 2.0 is rolled out. Despite having raised sales taxes to 8% on wage earning households, and still considering raising them further to 10%, Abe has called for further cuts in corporate taxes from the current tax rate of 36% to 30% or less to help boost business earnings, adding further to their $2.65 trillion still un-invested cash hoard. And government spending will likely also be cut further. With government spending essentially flat over the past two years in Japan despite its recession, and with the current recession reducing government tax revenues further, Japan’s government debt of 240% of GDP—one of the largest in the world—will likely lead to government spending decreases under Abenomics 2.0.

So Abenomics 2.0 will mean continuation of traditional forms of austerity , combined with the newer forms comprised of a new emphasis on structural and labor market reforms.
Given the clear failure of Abenomics 1.0 to generate sustained economic growth and economic recovery for all but investors, bankers and big corporations in Japan since 2012, plus the strong likelihood that Abenomics 2.0 will prove little different in that regard, why then did Japan voters this past week vote to return Abe and his Liberal Democratic Party back into office? What’s going on? And is this apparent anomaly strictly a Japanese phenomenon? Or does it represent political changes occurring in some similar fashion throughout the advanced economies of Europe-USA-Japan, as the global capitalist economy continues to slowly weaken and slide into another general recession?

Dr. Jack Rasmus
copyright 2014

The Political Bases for Continued Austerity

(for the rest of this article, go to Dr. Rasmus’ website at:

http://www.kyklosproductions.com/articles.html)

TO LISTEN TO MY HOUR LONG PRESENTATION ON THIS TOPIC, ON MY ‘ALTERNATIVE VISIONS’ RADIO SHOW, DECEMBER 13, 2014, ACCESS EITHER OF THE ARCHIVED PODCASTS BELOW:

http://prn.fm/alternative-visions-global-oil-price-crash-consequences-12-13-14/

or at:

http://alternativevisions.podbean.com/

SHOW ANNOUNCEMENT:

“Dr. Jack Rasmus discusses the current global oil price deflation that began in earnest last June and is now accelerating, driving global oil from a prior 2014 high of $115/barrel to a recent low of $59. Jack explains how the net effect on the global economy will likely prove to b significantly negative overall, and that the price decline could fall as low as $40/barrel in coming months. The impact on Emerging Market Economies, already seriously slowing or in recession, will also prove significant—causing their currencies to collapse even further and in turn generating capital flight, declining credit availability, slowing investment, rising inflation, and inability of emerging market businesses and governments to finance previous incurred debt. Oil price deflation will almost certainly push Europe and Japan into general deflation and further recession, and toward more QE money injections that will further generate asset price bubbles. Rasmus predicts China’s current economic slowdown will continue in turn as Europe, Japan and Emerging markets slow their purchases of China exports. The contrary popular USA notion that lower oil prices mean lower gasoline prices and therefore more spending by USA consumers and businesses is challenged. In conclusion, Jack discusses how oil deflation globally could set off another round of financial instability worldwide, and how it will likely mean the ‘shale gas/oil fracking’ boom in the USA will now stall and could potentially set off a ‘junk bond market’ crisis in the USA similar to the subprime market real estate bust of 2007-09. Will the global oil glut and deflation lead to another ‘Asian Meltdown’, this time even more geographically dispersed; and, in the USA, will it lead to another ‘oil patch’ crash that occurred in the US southwest in the 1980s—this time affecting North Dakota-Wyoming, Alaska, and Pennsylvania as well as Texas and the southwest? (Read Dr. Rasmus recent posting on his website, http://www.kyklosproductions.com, ‘The Economic Consequences of Global Oil Deflation’, for further analyses).”

by Dr. Jack Rasmus, copyright 2014

A new wild card has just been introduced into an already increasingly unstable global economy: a growing world glut of oil and consequent oil price deflation.

Since June 2014, the price of high grade (ICE Brent) crude oil has fallen more than 40%, declining from around $115 a barrel, in January 2014, to just $67 a barrel at the end of November. That’s the lowest since the bottom of the 2009 recession. The price decline has not only been deeper than expected in a normal cyclical correction, but also appears more than just a temporary event. Some predict global oil prices will fall below $60 a barrel in 2015, and could potentially fall as low as the $40 a barrel collapse that occurred during the 2008-09 recession.

What effect a deep and sustained oil price deflation will have on the global economy—which is already drifting toward stagnation and, simultaneously, rising financial instability—is hardly being discussed at all in the western business press. Instead, oil deflation is reported as a positive economic development, both for the advanced economies (AEs) and for emerging market economies (EMEs), as well as the global economy in general.

Economists, the business press, and governments in the advanced economies are all giving a ‘positive spin’ to falling oil prices, claiming it will mean lower costs to both businesses and consumers in the AEs. Lower oil prices mean lower gasoline prices and thus more for consumer households to spend elsewhere. Lower oil costs will stimulate business investment and spending, it is argued, and thus also boost economic growth. But this simplistic view may prove incorrect, not only for the AEs but for emerging market economies in particular and for the global economy in general. The combined negative effects of deep and sustained oil price deflation may well outweigh their positive effects.

There are at least three major potential impacts on global economic instability that will likely follow in the wake of global oil price deflation, some of which have already begun to appear:
First, a more rapid appreciation of the US dollar, and the corresponding relative decline in the currencies of a number of emerging market economies (EMEs)—in particular those dependent on commodity exports and especially those for whom oil exports make up a significant percent of total exports. There is a long, historical and documented relationship between falling oil prices and a rising US dollar. So global oil deflation means a rising US dollar.

A second destabilizing impact from falling oil prices will be to contribute toward general deflation in Europe and Japan. Economies there have already entered recession. Despite trillions of dollars of liquidity injections by their central banks in recent months, price levels have still fallen to zero or less. Oil deflation will add significantly to a general deflationary drift in both Europe and Japan. That in turn will likely lead to even more liquidity injections by their central banks, in the form of more quantitative easing (QE), further feeding stock market and bond asset bubbles.

Third, decline in financial assets tied to oil could increase the tendency toward global financial instability. Oil deflation may lead to widespread bankruptcies and defaults for various non-financial companies, which will in turn precipitate financial instability events in banks tied to those companies. The collapse of financial assets associated with oil could also have a further ‘chain effect’ on other forms of financial assets, thus spreading the financial instability to other credit markets.

The positive impacts of falling oil prices on economies, including the USA, are generally over-rated. Oil price declines may not have as much positive impact on consumer spending and business investment that many in the AEs now assume. The total net effect on the global economy will therefore likely prove more negative than positive.

1. Oil Deflation’s Potential Impact on EMEs

The continued collapse of world oil prices since June has already been having a devastating effect on emerging market economies, especially those dependent on commodity exports—like Brazil, Chile, Argentina and South Africa, and even Australia and a number of economies in southeast Asia. Oil deflation has had an even more severe impact on those EMEs highly dependent on oil exports as a large percentage of their commodities mix—like Venezuela, Russia, Nigeria.

The initial transmission mechanism by which global oil deflation negatively impacts EMEs is falling currency exchange rates. Oil price deflation is generally associated with a corresponding rise in value of the US dollar relative to other currencies. A rising dollar in turn means falling currency values for other countries.

Since the collapse of global oil prices began in earnest last June, the Russian Ruble has fallen approximately 38%. The Venezuelan currency, the Bolivar, by around 45%. Nigeria’s currency, the Naira, has declined 12% just since mid-October. Even the currency of developed oil exporting countries, like Norway’s Krone, has fallen 17%. After having remained stable for several years, the US dollar clearly began to rise last June, as global oil prices commenced their freefall that same month. So falling oil prices drive the dollar up and in turn depress EME currencies, and especially depress the currency of oil exporting economies. And the more dependent the economy is on oil exports, the greater the EME currency decline.

In other words, it’s not sanctions on Russia by the west that are responsible for the lion’s share of the ruble’s recent decline. Nor is it Venezuelan domestic economic policies that are contributing most to the decline in the value of the Venezuelan Bolivar. It is the collapse of global oil prices that is the main culprit.

All commodities, not just oil, take a major hit when sustained oil deflation sets in. A sharp and sustained decline in oil is generally associated with declining sales and prices of other commodities. The entire global commodities sector may be impacted negatively. That has already begun to happen with commodities like copper, gold, and other industrial metals, that have begun to fall as well in the wake of the current oil price decline. The Bloomberg Index of 22 basic commodities, for example, has recently fallen to its lowest level since 2009.

Even non-oil, but commodity heavy, exporting EMEs have experienced significant currency declines relative to the US dollar since global oil prices began to fall more rapidly last June. In recent months Brazil’s Real has fallen 15.5% and Australia’s dollar by 12%–and in both cases despite their central banks’ interventions in currency markets to prevent even further currency declines.

Declining EME currency values sets in motion a number of critical economic developments that cause EME economic growth to slow sharply, and even precipitate recessions.

For example, sharp declines in currency values lead to capital flight from the EME. Both domestic and foreign investors dump those currencies, buy dollars, and send capital out of the country to buy US assets—typically US bonds and stocks and other assets that may be attractive as well, like real estate. The EME capital flight is then reflected in EME stock market declines and a rise in EME government bond interest rates. Former flows of foreign direct investment into the EME also slow. Money capital in general dries up. Credit becomes scarce. Falling currency values also lead to higher cost of imported goods for consumers and consequent decline in consumer real incomes and spending. Business exports also decline. All the above translate into slowing real economic growth in the EME, and even recession. And all because of rising dollar—the global trading and reserve currency—and the decline in the EME’s currency exchange rate that sets the process in motion.

This very process has already been going on, in a muted form, for the past year for EMEs. Talk by the US central bank, the Federal Reserve, of its plans to raise interest rates in 2015 has provoked a number of the trends above already. Note that just the talk of rising rates has resulted in an ‘on again/off again’ destabilization of a number of EMEs during the past year. Some EMEs have been able to partially and temporarily offset the effects of possible rising US dollar—that is, for now. However, should the US Federal Reserve actually raise rates, the effects on EME currency depreciation, capital flight, and so on will certainly grow worse.

But even before that ‘worse’ may occur, the rapid drop of oil prices since last June is having the very same effect right now, in the present, that the US Federal Reserve’s policy shift may also have in the near future: that is, it is causing the US dollar to rise and EME currencies to fall, thus setting in motion the aforementioned destabilizing effects on their economies. It is just that the oil deflation-rising US dollar effect is impacting the oil and commodity export dependent EMEs first and most severely at the moment. A more general negative impact may soon follow, and most certainly will sometime in 2015.

2. Oil Deflation’s Potential Impact on the Eurozone and Japan

In the cases of the Eurozone and Japan economies the main risk from global oil price deflation is that falling oil prices will further push already near zero general inflation rates into deflationary levels. Already the Eurozone’s general inflation is a mere 0.2% and Japan’s less than 0.8%. The central banks of both have a public inflation target of at least 2%, but are moving in the opposite direction from that goal, despite trillions of dollar equivalents of Euros and Yen injected into their economies by their central banks in recent years. Their general price levels have continued to fall.

Should oil deflation push their economies over the cliff into general deflation, it will no doubt be an excuse to inject even more trillions of dollars into their economies, in the false ideological notion that, in today’s economy, more money raises the general price level. History has shown this view to be nonsense, of course. Massive central bank liquidity injections result in financial asset inflation, but not in general inflation for goods and services in the real economy. In fact, liquidity injections lead to financial asset bubbles. But oil price deflation will be the excuse, nonetheless, for still more ‘QE’ money injections in both Japan and Eurozone in 2015. Should further liquidity injections occur, that will contribute even more to financial asset bubbles and instability.

The argument by Euro policy makers—as by their USA cousins—is that lower oil costs will free up income for households to spend on other consumption, as well as add income to businesses which they will subsequently invest. But both premises may prove incorrect.

Deflation produces a negative consumer and business psychological effect, a ‘deflationary expectations’ psychology. Falling prices, i.e. general price deflation, may lead consumers to expect prices to fall still further, and thus cause them to freeze up immediate spending. The same goes for business investment activity.

Uncertain about how far prices for their products my fall by the time they bring them to market at some future date, business uncertainty may instead lead them to forego additional investment even though they have additional income with which to invest as a result of oil cost declines. In other words, deflation is perverse. Deflation in general prices, made possible by oil deflation, may actually result in less consumer spending and less business investment—not serve as a stimulus to both.

3. Oil Deflation & Global Financial Instability

Oil is not only a physical commodity bought, sold and traded on global markets; it has also become an important financial asset since the USA and the world began liberalized trading of oil commodity futures (i.e. a financial security) in the late 1990s on a global scale.

Just as declines in oil spills over to declines of other physical commodities (e.g. copper, iron ore, gold, etc.), oil financial securities (i.e. oil commodity futures) price deflation can also ‘spill over’ to other financial assets, causing their decline as well, in a ‘chain like’ effect.

That chain like effect is not dissimilar to what happened with the housing crash in 2006-08. At that time the deep contraction in the global housing sector ( a physical asset) not only ‘spilled over’ to other sectors of the real economy, but to mortgage bonds (i.e. financial assets representing housing and commercial construction), and derivatives based upon those bonds, also crashed. The effect was to ‘spill over’ to other forms of financial assets that set off a chain reaction of financial asset deflation.

The same ‘financial asset chain effect’ could arise if oil prices continued to decline below $60 a barrel. That would represent a nearly 50% deflation in oil prices that could potentially set in motion a more generalized global financial instability event, possibly associated with a collapse of the corporate junk bond market in the USA that has fueled much of USA shale production.

Is the USA Economy an Exception?

(For the remainder of this article, go to Dr. Rasmus’ website,

http://www.kyklosproductions.com/articles.html

published teleSUR English Edition, Nov. 27, 2014

For a print published version of this topic on the Republic Congress’ new aganda (updating the podcast on the Alternative Visions radio show available below on this blog)…

go to Jack Rasmus’s website, http://www.kyklosproductions.com/articles.html. The website is also accessible from the sidebar on this blog.

DESCRIPTION OF ARTICLE:

‘The USA Republican Congress’ New Agenda’

‘In the wake of the recent midterm elections, Dr. Rasmus describes how the new Republican controlled Congress has begun to develop new policies on behalf of Corporate America, many of which represent a resurrection of past policies of the Bush administration—i.e. old wine in new bottles. Rasmus briefly describes the major pro-corporate policies introduced and passed by Congress during the Obama administration, 2009-2014. He then identifies the new pro-Corporate agenda for the next two years, 2015-2016: more corporate tax cuts, accelerated push for free trade for pacific rim countries and europe, immigration reform defined as more policing and fences, rollbacks of environmental protection initiatives (XL pipeline, industrial plant emissions, public lands fracking, EPA funding, international CO2 limits), Affordable Care Act revisions (more business exemptions, cost shifting to consumers, limits on Medicaid), limits on financial regulation under the Dodd-Frank Act, more aggressive foreign policy action (green light for conflicts and funding of proxies in Syria, US troops to Iraq again, Ukraine (US advisers, special ops, money), NATO push into east Europe (Ukraine, Moldova, Georgia), more freedom of action for NSA spying on US citizens and limits on free speech and assembly. Rasmus predicts the Democrats and Obama will agree with a number of the legislative policies that will soon be proposed by the new Republican majority in Congress.’

The following ALTERNATIVE VISIONS radio show is available for listening and download at:

http://prn.fm/alternative-visions-japans-recession-contradictions-global-capital-11-29-14/

or at:

http://www.alternativevisions.podbean.com

SHOW ANNOUNCEMENT:

Dr. Jack Rasmus describes Japan’s latest 2014 recession as yet another example of growing global Capitalist economic contradictions. With its stock markets booming, exports rising, unemployment at a 16 year low, interest rates at zero and massive money injections by its central bank—how is it that Japan’s economy has plunged again the last six months into a severe recession once again? Is it that it has introduced QE monetary policies too ‘late’, as one wing of mainstream economists argue (i.e. ‘retro classicalists’)? Or is it because it has not introduced fiscal stimulus government spending, as another wing of economists argue (i.e. ‘hybrid keynesians’)? Jack challenges both explanations. Real wages and real household income continues to decline, and consumption falter in turn, Jack argues, because job growth has been largely ‘contingent’(part time/temp), because Japan QE/monetary policy has depressed its currency by 35% and raise the cost of consumer imports that reduces real wages still further, and because Japan fiscal policy raised consumer taxes and reduced household income still further in turn. Jack argues Japan is yet another ‘model’ and example of how capitalist monetary policies driving the world economy today bail out wealthy investors, bankers, and multinational companies first and quickly, but result in a failure to boost real investment, jobs and average consumer incomes as well in the process. With little household demand for real goods and services, businesses cut labor costs (wages) instead to boost profit margins and then hoard their cash, or invest it offshore, or divert it to financial asset speculation globally. Capitalist monetary policies bail out the rich, but simultaneously cause the rest of the global economy to gradually grind to a halt—Japan being but the latest, and most extreme, example of the growing contradictions of global capital today.

On April 30, 2014 the International Monetary Fund (IMF) provided Ukraine a two year, $17.1 billion standby loan, justified at the time as necessary to stem the country’s accelerating economic decline. In exchange, Ukraine turned over the macro-management, restructuring, and the future of its economy to the IMF.

Today, six months later, it is reasonable to ask how Ukraine’s economy has fared in the interim? How has the IMF plan performed thus far? And what are the prospects for Ukraine’s economy in the months immediately ahead under continuing IMF management?

For the six quarters (18 months) prior to April 30, 2014 Ukraine’s economy declined 1%-3% every quarter except one. In the first three months of 2014 its GDP fell another -1.1%. But since the IMF deal was signed in April, the decline has accelerated: In the April-June 2014 period Ukraine’s GDP fell a more rapid -4.6%. GDP figures are not yet available for the most recent, July-September 2014 period, but it appears very likely the economy is now deteriorating even faster.

For example, according to World Bank data, while industrial production fell -5.8% in the first half of 2014, in July and August its decline accelerated to -12.1% and -20.1%, respectively. Other key indicators of the economy reveal a deterioration from January through August, especially business investment (-25.6%), construction (-15.6%), trade (-13.8%), exports (-14.4%) and imports (-21.2%). Those figures do not yet include the two most recent, and no doubt even worse, performing months of September-October.

During the same January-August period, inflation also rose by 20%, Ukraine’s currency plummeted by 36% (the most globally of any economy), and Ukraine central bank’s foreign currency reserves—needed to stem its currency collapse, to finance desperately needed exports & imports, and to provide essential credit to its increasingly fragile private banking system—began evaporating. Foreign reserves fell $4 billion in October alone, to a nine year low of barely $12 billion. With currency, reserves, and credit all collapsing, capital flight continues to intensify, recently prompting Ukraine’s government in desperation to impose a $200/day limit on withdrawals.

Last April the IMF assured its initial $17.1 program would result in only a -5% fall in Ukraine’s GDP this year, with a return to 2% positive growth in 2015.

However, an IMF preliminary review in mid-July of the program’s progress concluded that while “all performance criteria and benchmarks were being met” nonetheless, along a number of fronts the economy was deteriorating rapidly. The IMF therefore raised its GDP decline estimate to -6.5%.

In August, as the economy continued to further deteriorate, the IMF revised its April estimate again, predicting a -7.3% decline in 2014 and this time a -4.6% in 2015 instead of 2% growth.

An indication of just how fast the economy has been deteriorating, just last month, in early October, the World Bank raised that number to an -8.0% GDP drop for 2014. The Bank noted an even worse scenario was likely, if gas prices continued to rise in 2014(which they will with the onset of weather and the recent Ukraine-Russia gas deal) and if military conflict continues in the eastern regions (which has been intensifying anew). The only growth sector of the Ukraine economy is government military spending, as it battles separatists in its eastern Donetsk-Luhansk regions.

Many economists considered the IMF’s initial April estimates for Ukraine absurdly optimistic, this writer included, who predicted last March that Ukraine’s GDP would collapse at least -10% to -15% in the coming twelve months; furthermore, Ukraine would need a $50 billion bail-out in the next two years, not the IMF’s $17 billion. That 8% GDP drop so far amounts to $14 billion reduction in Ukraine’s 2013 GDP of $177 billion.
To date, the IMF has only distributed to Ukraine $4.5 billion of the $17 billion. But that $4.5 billion disbursement has had little positive impact on Ukraine’s real economy and provides essentially no ‘offset’ to the $14 billion real decline to date.

A significant percentage of that $4.5 billion has already been paid by the IMF to itself and to western bankers for debt previously incurred. In fact, according to Bloomberg business, Ukraine has more than $15 billion in payments coming due between now and the end of 2015. One could logically argue that the IMF’s initial $17.1 billion will be used to pay back $15 billion.

Another part of the IMF’s paltry $4.5 billion disbursement to date is directed to Ukraine’s central bank, in order to try to stabilize Ukraine’s currency, the hryvnia, that has been in freefall for months. And yet another $2.7 billion disbursement, scheduled for later in 2014, will likely be used by Ukraine’s state owned gas company, Naftogaz, to pay Russia for natural gas through next winter, and for payments owed for past gas deliveries, both as part of an agreement recently reached with Russia’s Gazprom.

Concerning the impact of IMF policies involving natural gas, gas prices have already risen 50% for many consumers, devastating incomes and depressing consumption. But the other foot will fall after January 1, when subsidies to households, now covering up to 7/8ths of the cost for gas, will start being discontinued.

So most of the $17.1 billion original IMF deal has had, and will have, little positive impact on Ukraine’s real economy. The lion’s share of the $17.1 billion goes to service past debts to creditors outside the country. And what remains in funding, i.e. what doesn’t go to creditors, goes mostly to Ukraine’s central bank—i.e. to try to stabilize its currency, to finance external trade (exports-imports), and to replenish evaporating foreign exchange reserves. Meanwhile, gas policies, as well as government spending cuts, tax hikes on consumers, and other ‘fiscal’ measures in the IMF plan directly impact both household consumption and government spending.

The IMF’s $17.1 billion April loan is classic IMF strategy, designed to take over an economy and manage it in the interests of western banking and multinational corporate interests. IMF lending is foremost about ensuring interest and principal payments are made on schedule. The first priority is to provide loans to ensure repayments. Bankers get paid first, along with the IMF. Second priority is to provide the country’s central bank funds necessary to stabilize its currency. A stable currency is needed to encourage western foreign direct investment into the country, i.e. to buy up and take over its domestic industry. Third priority is to enable indigenous businesses and consumers to purchase exports to the country from the west.

Thereafter the IMF plan is to fundamentally restructure the economy so that social spending programs are cut massively and wage pressures are reduced on business as layoffs take place as part of restructuring to make business more ‘efficient’. Social program cuts and layoffs tame the working classes to accept lower wages and to work harder, increasing productivity, if they want to keep their jobs. Finally, the classic IMF intervention program aims to reduce the size of the government and the public sector, so that it doesn’t compete with private businesses for credit or directly in markets. Reducing government spending and deficits also creates more budget room for business and investor tax reduction. That model is precisely what occurred in Greece, Portugal and elsewhere in recent years. And it’s being implemented today in Ukraine.

Contrary to IMF assurances last April, nearly everywhere since April the Ukraine economy is declining at double digits rates—industrial production, investment, consumption, trade, currency values, foreign exchange, and now GDP itself. So the Ukraine economy is currently spinning out of control—not stabilizing as the IMF April 2014 plan and deal originally assured—heading toward the 10%-15% GDP collapse and the need for $50 billion in bailout.

The IMF itself has recently recognized the seriousness of the situation, indicating it may have to add another $19 billion in bailout. But that doesn’t mean it will provide it. Western Europe is descending into a third recession in five years and is in no mood to give more. And the USA is preoccupied with ISIL, Iran, and domestic politics.

Ukraine’s President Poroshenko recently toured European capitals and Washington with his ‘hat in hand’. He reportedly “gave the speech of his life and got $53 million. That funds the cost of the war in the East for 9 days”, to quote the USA newspaper, The Washington Post.

The IMF’s cover for the failure of its program in the Ukraine is to blame the accelerating decline on the continuing military conflict in the East and on the natural gas crisis, escalating prices, and growing Naftogaz debt. While military conflict has contributed, the scope and magnitude of the Ukraine economic collapse now underway is attributable to various economic forces well beyond the military conflict—not least of which is the IMF program itself.

The fact that the IMF continues to revise its economic estimates downward, almost monthly, and that it is raising the possibility of the need to provide as much as $19 billion more in bailout, is ample testimony of the failure of the program.

Meanwhile, Ukraine’s real economy and its citizens suffer severely as a result, with all indications that the economic crisis there will get worse, perhaps much worse, before it ever begins to get better.

Dr. Jack Rasmus

Dr. Rasmus is the author of ‘Epic Recession: Prelude to Global Depression’, 2010, and ‘Obama’s Economy’, 2012, both published by Pluto Press; and the forthcoming ‘Transitions to Global Depression’, by Clarity Press, 2015. His website is http://www.kyklosproductions.com and blog, jackrasmus.com.

Dr. jack Rasmus on the Republican Congress’s Emerging Corporate Agenda, listen to ALTERNATIVE VISIONS radio show of November 22, 2014 at:

http://prn.fm/alternative-visions-new-republican-congresss-4th-corporate-offensive-11-22-14/

or at:

http://alternativevisions.podbean.com/

SHOW ANNOUNCEMENT:

In the wake of the recent midterm elections, Dr. Rasmus describes how the new Republican controlled Congress is about to develop new policies on behalf of Corporate America, many of which represent a resurrection of past policies of the Bush administration—i.e. old wine in new bottles. Rasmus identifies and explains the likely emerging new policy initiatives in the weeks and months immediately ahead: more corporate tax cuts, accelerated push for free trade for pacific rim countries and europe, immigration reform defined as more policing and fences, rollbacks of environmental protection initiatives (XL pipeline, industrial plant emissions, public lands fracking, EPA funding, international CO2 limits), Affordable Care Act revisions (more business exemptions, cost shifting to consumers, limits on Medicaid), limits on financial regulation under the Dodd-Frank Act, more aggressive foreign policy action (green light for conflicts and funding of proxies in Syria, US troops to Iraq again, Ukraine (US advisers, special ops, money), NATO push into east Europe (Ukraine, Moldova, Georgia), more freedom of action for NSA spying on US citizens and limits on free speech and assembly. Jack explains how the new emerging policy offensive fits in the four decade long current pro-corporate offensive in America by US government and institutions. Jack provides an historical context for it all and how resistance represents the latest effort in a centuries long struggle by American people to expand and defend their democratic, civil and economic rights since the American revolution period of 1776-1787.

Listen to Dr. Jack Rasmus on this archived podcast of the ALTERNATIVE VISIONS RADIO show, on the topic ‘Why Austerity Continues’, Nov. 15, 2014 at:

http://prn.fm/category/archives/alternative-visions/#axzz26ySyu8Fl

or at:

http://www.alternativevisions.podbean.com

SHOW ANNOUNCEMENT

Jack Rasmus takes a look at why Austerity policies were introduced in 2008-09 and why they continue still today, evolving into new forms, despite their proven negative impact on economic recovery. Jack challenges liberal economists like Paul Krugman who lament the continuation of such policies, explaining Liberals don’t understand the purpose and function of austerity policies, which are integral to capitalist recovery strategies since 2008. Austerity is the complement to a primary focus in advanced capitalist economies on monetary policy as the preferred strategy for economic recovery—i.e. central banks’ bailouts of private banks and investors via QE, zero rates, auctions and forward guidelines. While monetary policy is primary, austerity is a necessary complement, Jack explains, to bank bailouts which produce slow, intermittent, and 5-10 year or more economic recovery trajectories. Jack looks at how Austerity has functioned so far in Europe, USA, Japan and now Ukraine, why it has continued and why it will continue, morphing in to new forms. Austerity policy is a class policy and integral to capitalists’ view of how recovery should be engineered, Jack explains. That’s why Krugman and others don’t understand why it continues. (Next week’s show is ‘Back to the Future’, a detailed look at the new Republican Congress’s 10 priorities for the next two years, that are just a rehash and resurrection of George W. Bush policies in new form going forward).

published teleSUR English Edition, November 13, 2014

All the advanced economies (AEs)—USA, Europe, Japan—have implemented some form of ‘austerity policy’ in the wake of the 2008-09 global financial crash and deep recession that followed. Five years later, austerity continues as a centerpiece of their policy mix even as their economies continue to struggle with recurrent double and triple dip recessions (Eurozone, Japan) and, in the case of the USA, periodic relapses into single quarter negative GDP and ‘stop-go’ recovery. Real investment continues to gradually slow everywhere in the AEs, with insufficient wage growth, stagnating household consumption, and a slow but steady drift toward deflation everywhere.

One of the key global economic questions today is: ‘why austerity?’ More specifically, why do AE capitalist policy makers continue with austerity policy when it clearly hasn’t worked? Indeed, what does it really mean to say austerity ‘hasn’t worked’?

Professional economists are generally confused about these questions. Mainstream liberal economists like Paul Krugman, Alan Blinder, and Martin Wolf scratch their heads, perplexed, and wonder out loud in their weekly newspaper columns why politicians in the AE economies continue with their austerity policies, when it is clear such policies are contributing to preventing economic recovery.

Three Blind Economic Mice

In one of the more recent of his many New York Times columns criticizing austerity policies, entitled ‘Revenge of the Unforgiven’, Krugman notes that “The world economy appears to be stumbling” and that “growth is stalling, and the specter of deflation looms”. For Krugman austerity policies are one of the big causes, perhaps the main cause of this global slowdown, and especially the cause behind Europe’s current emerging third recession since 2009.

Krugman condemns austerity and asks “why do governments keep making these mistakes? In particular, why do they keep making the same mistakes, year after year?” In other words, austerity policies are the consequence of some kind of error or bad economic judgment. That error in judgment is attributed in turn to a moral failure on the part of policy makers, according to Krugman. Austerity policies continue due to “an excess of virtue. Righteousness is killing the world economy”. In the Eurozone the root of that excess virtue and righteousness is Germany, according to Krugman. It insists on maintaining an attitude of “moral indignation” toward debtors who refuse to pay their bills. If Germany would only not insist its neighbors pay their debts (to Euro Commissions, the IMF, and of course to German banks), its Euro neighbors could then abandon austerity and re-stimulate their economies with government spending. Krugman’s solution therefore is to get German policymakers to overcome their excessive virtue and sense of righteousness toward their neighbors, and just let them forego paying their debts (to German bankers and others). Better yet, expunge the debts. But that’s not likely to happen, Krugman adds, until a recession in Germany “will finally bring an end to this destructive reign of virtue”.

So the loss of virtue, excess righteousness—i.e. moral failure—explains why AE policymakers in general, and in the Eurozone and Germany in particular, have stuck to austerity for so long and want to continue it. And it was just a ‘mistake’ to introduce it in the first place. In this Krugman view, there’s no need to consider an analysis of political or economic interests—and especially class interests—as the source of austerity policies, or to explain why such policies have continued for more than five years now, or why they don’t appear about to be abandoned anytime soon. It’s all been just a mistake and continuation of austerity is due to moral stubbornness.

The UK economist and feature writer for the Financial Times, Martin Wolf, echoes the same themes of Krugman with regard to the UK economic experience since 2010: Its origins circa 2010 in the UK were “ a blunder” and “a huge mistake”. Its continuation “worse than a crime”. And those who insist on still pursuing it, like US president Hoover in the 1930s, are “both stupid and wicked” (moral arguments).

In a similar recent editorial in the Wall St. Journal attacking austerity programs, in a piece entitled “Enough with European Austerity, Bring On the Stimulus”, economist Alan Blinder, a former vice-chairman of the Federal Reserve in the USA, also declared that Euro austerity policy was due to a ‘mistake’. Once again the focus of attack is “German obsession with austerity” that “is holding back growth”. Germany is again the ‘bogeyman’ here, standing in the way of the heroic European Central Bank chairman, Mario Draghi. Blinder laments that instead of QE and more liquidity for the Euro banks, Europe is instead moving toward more ‘structural reforms’. But structural reforms are just “a potpourri of pro-market policies”, in his view, and will not lead to recovery. True enough. But what Blinder, the former USA central banker, proposes is dear to the heart of all central bankers: more free money to bankers and investors in the Eurozone—that is, more QE. If only the Germans would let poor Mario do his job! But the German central bank president, Jens Weidmann, “won’t budge—at least not yet”, according to Blinder.

Explanations of why austerity originated and why it continues like the foregoing, that are explained by ‘mistakes’ and the ‘moral attitudes’ of policy makers, tell us really nothing about the origins of and reasons for austerity policy’s origins, or why it has continued for more than five years now and continues still to morph into new forms today.

In fact, Krugman & Co. are asking the wrong question. More precisely, they are asking only half of the right question. When they concur that ‘austerity doesn’t work’, the sentence is incomplete. They should be asking ‘For whom does it not work’? For austerity does work, indeed is essential—for bankers, investors, corporations and the wealthiest households. It just doesn’t work for the rest.
Monetary Policy as Capitalist Preferred Solution
Austerity is a blatant class-based program. Its purpose is to enable capitalist policy makers to pursue their primary and preferred economic recovery strategy. That preferred strategy is based on monetary policy—not fiscal policy.

Back in 2008-09 AE policy makers jointly decided to rely primarily on AE central banks—the Federal Reserve, Bank of England, Bank of Japan, and the European Central Bank—as the prime institutions for managing economic recovery. The central banks, led by the USA Federal Reserve, together pumped massive liquidity (money) into the their banking systems in the belief that capitalist finance will then lead the way to economic recovery. The central bank tools employed were quantitative easing (QE), zero interest loans (ZIRP), special auctions where needed in severe emergencies, and what was called ‘forward guidance’ whereby central bank bureaucrats signal bankers and other big capitalists their direction and plans beforehand. Tens of trillions of dollars and other AE currencies were printed and otherwise provided to the private capitalist banking system. Private banks were thereafter supposed to lend to non-bank businesses, who would in turn invest and expand and hire new workers. Incomes would subsequently grow, consumer spending would rise, and GDP and economic growth return. At least that was the theory. Fiscal stimulus as government spending was considered unnecessary for recovery. Even when offered, it was token, temporary, and soon withdrawn once again.

The problem was, and still is, that despite tens of trillions of dollars provided to the private banking system, the private banks were not eager to lend to the vast majority of businesses, especially small and medium businesses. They loaned their central bank provided funds to other shadow banks globally, who speculated in various financial asset markets instead. Of course, that didn’t generate much in the way of real investment, jobs, incomes, consumer spending, and economic growth in the AEs. Much of that lending for financial investment went off shore to emerging markets in any event.

Bankers also loaned to non-financial investment projects, but mostly again offshore to multinational corporations and to China and emerging markets. That too did not generate much real recovery in the AEs. A third thing bankers did with the central bank trillions given them was to buyback their stock and payout dividends. That raised their valuations and got bank senior managers nice bonuses. Thereafter the banks sat on their remaining cash—not insignificant sums—and hoarded it. In the USA alone that remaining cash hoard is reportedly today at around $2 trillion.

Given this scenario of the trillions of dollars provided by central banks to AE private banks, that did not direct it to the real economy to create investment, jobs, incomes, etc., AE policy makers ‘doubled down’ and provided the private banking system and investors even more liquidity in the hope that more liquidity would ensure some getting through. Zero interest rates were continued year after year and even more quantitative easing (QE) programs were introduced. In short, more monetary policy has always been the preferred policy of choice of all the AEs, even when it has produced few results.

After five years, it is now absolutely clear that everywhere in the AEs monetary policy in the form of central bank massive liquidity injections have been the primary policy choice for attempting to restart their economies after the 2008-09 crash. Fiscal policy in the form of government spending or even household tax reduction has never been on AE policy makers agenda anywhere for the past five years, regardless how much Krugman & Co. wish it were so. Monetary policy has always been—and still continues to be—prime. It has been the preferred policy choice of AE policy makers from the very beginning in 2009-10, and continues to be so today.

Austerity Policy as Necessary Complement

But that still doesn’t explain why cutting government spending, ‘negative fiscal policy’, or fiscal policy ‘in reverse’—i.e. austerity—has been part of AE policy mix for the past five years. The general answer to that is that austerity has accompanied the massive central bank liquidity expansion, the prime strategy of the AE policy makers, because austerity functions as a necessary complement to central bank massive liquidity injections.

Austerity is about keeping the lid on rising government debt and making ‘the rest of us’ pay for that debt, while waiting for monetary policy to restart financial markets and for the market system itself at some subsequent point to eventually generate economic growth. The problem is that this ‘monetary policy first’ approach and path to recovery only results in recovery very slowly, with significant delays, and with repeated relapses into short and shallow recessions. Monetary policy based recovery thus takes potentially a long period of time, typically five to ten years. It may prove even longer, as Japan’s economy since the early 1990s is a prime example.

Capitalists and their policy makers truly believe that the capitalist market will ‘correct itself’ in the longer run. They believe that the way to jump start that market-driven recovery is to do it via supply side policies. They believe that pumping massive money injections into the banks starts the supply side process. It’s the first step. After that, banks will lend, businesses will invest, jobs will return and consumers will spend once again. To put money directly into workers’ paychecks and consumer households first by government spending and investing (i.e. Krugman & Co. ‘Demand-Side’ view) relegates bankers and businesses to a secondary recovery position. Demand-side government spending policy means households, consumers and workers recover first, then it spreads to bankers and businesses as the former buy their products. For capitalist policy makers it is preferable to reverse that process: ensure that bankers and big businesses recover first and rapidly, then wait for the market system to eventually bring the rest along.

And if it takes long, 5 years, 10 years, if the recovery is slow and intermittent, then rising government debt must be contained in the meantime. That’s where austerity policy comes in. If that debt is not contained the government debt rise may offset and even negate the monetary policy’s effect. So austerity must accompany a preferred monetary driven recovery policy. It is complementary and necessary to the primary and preferred monetary policy.

To the extent that austerity policies serve this function of containing the rise in government deficit and debt, then austerity policies ‘work’. Austerity policy therefore is not an ‘error’ or a moral failing when class interests are considered. AE capitalists and policy makers are not blind fools, or excessively righteous, or ‘wicked’, as Krugman and others would suggest. It is Krugman & Co. who are blind—to the real class based origins and functional purpose of austerity policies. They think that austerity policy is about a failed strategy for stimulating the economy. But that’s not what austerity is about. Nor is it a ‘mistake’ or due to moral failings. To put it succinctly, austerity is about making the general populace and the working classes pay for the monetary policy strategy’s slow, often interrupted, and limited impact on the real economic recovery.

So has ‘austerity’ failed? The answer is ‘failed for whom?’ In other words, it can’t be determined if it has failed apart from a class analysis of it. And that’s where the Krugman and others miss the whole purpose of austerity in the first place. And why are austerity policies continuing? Because so long as monetary policy continues to fail to generate a sustained and normal economic recovery, AE policymakers will continue with some form of austerity policy.

Dr. Jack Rasmus, November 12, 2014

published TeleSUR English, October 18, 2014

The Eurozone economy has never really recovered from the 2008-09 financial crash and recession. Austerity policies—that played a major role in preventing a sustained Eurozone economic recovery for the past five years—are now evolving into still newer forms.

Events in the recent past in Spain, measures approved in just the past week by the newly formed Renzi government in Italy, and proposals being debated at this very moment by the Holland government in France all point the way to the new forms of austerity now taking shape in the Eurozone.

No longer just cuts in government social programs and elimination of subsidies for the working poor, as before, the ‘New Model’ for Austerity emerging in the Eurozone consists of direct attacks on workers’ wages and incomes. The plan is to hold down wages in order to lower business costs and price of exports. Boosting exports in turn, it is hoped, will lead to more investment which has been steadily declining for years in the Eurozone. This scenario takes place under the cover of what is being called ‘structural economic reforms’ in general and, specifically, ‘labor market reform’ as the central element of general structural reforms.

Eurozone Recessions: What’s Different This Time

The Eurozone’s 18 economies have already experienced two recessions since 2008. Sandwiched in between were two very brief, shallow and weak recoveries. This past spring, the region descended once again into recession, its third. The first recession represented the region’s participation in the global financial and economic crash of 2008-09. The second recession of 2011-12 was concentrated largely in the region’s periphery economies— especially Greece, Italy, Spain and Portugal. The current 2014 recession appears will have even a wider potential impact. Now France and Germany—the latter comprising 29% of all Eurozone output—appear leading the way and slipping into recession.

Germany’s economy grew and thus dampened the decline of the second Eurozone recession. But it declined in the second quarter this year, 2014, and almost certainly will do so again in the 3rd quarter just concluded on September 30.

Recent monthly data show German factory orders falling -5.7% last month, the most since 2009; its industrial production fell -4%, and its exports declined by -5.8%. With the ‘core’ Eurozone economies like Germany weakening this time, leading the way, the Eurozone’s 3rd recession may thus prove not only qualitatively different, but potentially even more severe.

The 2014 recession comes at a point in which the entire region is still collectively more than -2% below its peak in 2008. Spain’s economy today, in 2014, remains -6.5% below its peak and Italy’s still 9% below peak. After five years of ‘recovery’, France’s output is only 1% higher than five years ago in 2008, and Germany’s only 3%. That’s less than a half percent growth per year after five consecutive years for the two largest economies, Germany and France. Best case, that’s a five year stagnation in the region’s two largest economies, while Italy and Spain, the next largest economies, still remain mired in deep recession and depression, respectively, after five years with no real recovery for either on the horizon.

Perhaps the best indicator of the deep weakness of the Eurozone economy today is its labor market. In the region overall, unemployment has remained consistently in the 11%-12% range now for more than five years now. In Italy more than 12%, France 10.5%, and in Spain still nearly 25%. But the picture is even worse than these often reported general job statistics. Youth unemployment rates in both Italy and Spain, for example, are 45% plus. And those youth who have been able to obtain work, have been largely limited to part time and temp work. In France the percent of youth in the workforce age 15-24 who are employed as temps has risen to 59%. In Germany 52%, Italy 54%, and in Spain an incredible 65% can only find temp work, when any work at all. And it’s not just age 15-24 youth workers. In Italy, 70% of all new hires have been temp workers. Temp means lower wages, fewer benefits, far less job security, and employer ‘rights’ to layoff and fire at will. The chronic high unemployment and the large number of low wage temp jobs translates into wage compression in general, with few exceptions, for the rest of the Eurozone working class.

Nevertheless, the target of the ‘new model’ austerity now on the Eurozone agenda is designed to extend and deepen that wage compression by introducing what is being called ‘labor market reform’. In addition to high unemployment and temp hiring, which will continue as a dual force already depressing wages, the new 3rd force of ‘labor market reform’ will extend wage cutting further, targeting the non-temp, permanent Eurozone working class in Italy, France, and elsewhere in particular.

The rationale behind the new direct attack on wages is the argument by a growing number of Euro capitalist elite and politicians that Europe must somehow ‘export’ its way out of its latest recession. Central bank monetary policies have failed for five years to get the Euro banks to lend. And prior forms of austerity policy have not reduced the growth of government and private sector debt. So exports must be the answer. The focus on exports means that the costs of production must be reduced. That means in turn a reduction of labor costs—i.e. by cutting wages and by finding other ways to raise productivity. And that means so-called ‘labor market reform’—i.e. the cover phrase for wage reduction.

Spain: Testing ‘Internal Devaluation’ by Wage Reduction

The forerunner to this new model austerity has been tested in the past two years in Spain. Depression level unemployment of 25% has driven down wages. Hiring of mostly temp workers in the past five years has further kept wages depressed. Other ‘labor market reforms’ have been tested as well by Spain’s conservative Rajoy government, including introducing limits on collective wage bargaining by workers.

The result in Spain has been lower production costs that have made Spanish exports more competitive in recent years. To the extent that Spain’s economy has ceased declining recently, it is largely because of its exports rising—export gains made possible by steep wage reduction that have lowered costs and therefore prices of exports. While economic growth has only risen 0.6% in latest figures, it has halted the further decline of Spain’s economy. This fact has not been lost to capitalist policy makers elsewhere in Europe. The Spanish policy of reducing costs and prices of exports by reducing wages is sometimes referred to as ‘internal devaluation’. With the Euro as its currency, Spain cannot formally devalue its currency by itself to get a cost-price advantage to boost exports. But it can ‘internally devalue’ and boost exports by labor cost reduction, which it has.

But pushing unemployment up to 25% levels in France, Italy and elsewhere—as currently exists in Spain, Greece, and lesser extent in Portugal—is not a political option for Italy, France and the core economies of northern Eurozone.

Unemployment of around 12% today throughout the Eurozone for the past five years is already leading to a distinct rightward shift in politics throughout the continent. Nascent far right and fascist parties are growing everywhere. Eurozone capitalist elites realize that future political instability will not help economic recovery in Italy, France and the ‘core’ Euro economies. They recognize that a similar political upheaval on their eastern border, in the Ukraine, has already taken a serious toll on their economies. So engineering a 25% unemployment level as a means to deeply depress wages—as in Spain and elsewhere is not possible in the core economies of the region.

Another way must therefore be found in France, Italy, and the core northern economies now slipping into recession in order to generate an export-driven recovery. ‘Internal devaluation’ to reduce labor costs will have to take another form. That ‘other way’ is ‘labor market reform’—i.e. wage reduction by another name targeting the non-temp permanent employed workforce.

Italy’s Labor Market Reform

Last February a new prime minister, 39 year old Matteo Renzi, was elected and assumed control of government policy. Renzi immediately proposed structural and labor market reforms upon entering office. In fact, he made the ‘labor market reform’ his first announced and first priority. Renzi’s reform proposals were adopted by the Italian Senate just last week, in early October 2014. They are expected to pass the Italian legislature by year end and are scheduled to take effect sometime in 2015.

Not all the details are apparent as yet, but some outlines are. About one fourth of all of Italy’s 25 million workers are the target of the new reforms. What is known so far is that Italy’s new ‘labor market reform’ rules will make it easier for employers to hire and fire workers—both newly hired permanent workers as well as temp workers. Permanent workers now will also be easier to layoff and fire. Workers will have less access to court action if they are fired. No doubt anticipating a rise in permanent jobless as employers are given a freer hand to shed workers, Renzi’s measures call for a big increase in spending on unemployment benefits of 18 billion Euros. New hires’ benefits, severance pay, and rights will also be reduced when initially hired, and only slowly ‘phased in’ as they gain seniority on the job. Limits on workers’ collective ability to wage bargain are reportedly to be part of the new ‘reforms’ as well, although details so far are lacking what this will mean. Spain’s previous implemented similar measures to limit wage bargaining may serve as a start point or template perhaps. Not only will the labor market reforms lower business costs by compressing wages for new segments of the working class, but Renzi’s reforms include reducing costs by business tax reduction. Business labor tax cuts equivalent to 32 billion Euros are part of the Renzi reforms. Declining tax revenues will likely require more government spending reductions, thereby ensuring traditional austerity measures will continue as well.

It is important to note that previous forms of austerity are projected to continue, both in Spain and Italy. The new structural and labor market reforms are in addition to, not in lieu of, previous forms of austerity. Up to now, Eurozone Austerity measures have assumed three basic forms. Austerity has meant deep reduction in government spending, especially on social programs, with corresponding deep cuts in government jobs and government infrastructure investment. Austerity has also taken the form of governments selling off public assets to private investors to then exploit for profit. ‘Privatizing’ public assets means selling parts of the national health care systems, previously nationalized companies, nationalized utilities, public banks, etc. Austerity to date has also meant raising fees, government charges, new taxes of various kinds imposed on consumers and working class households, while simultaneously eliminating essential food, transport, and other subsidies for the working poor.

These are the ‘old’ traditional forms of Austerity; the new forms will occur under the cover of so-called ‘labor market reform’ and other structural economic reforms. Previous forms have been designed to make workers pay indirectly for the recession and failed Eurozone central bank recovery policies since 2009. With labor market reform, the new focus is on more direct wage and income reduction.

France to Follow Italy–Slowly

The push for structural and labor market reform is part of a growing consensus among Eurozone capitalist elites in general that a shift to some kind of growth policy is necessary if Europe is not to descend even faster and deeper into recession.

Labor market reform, and broader structural economic reform, is increasingly viewed as the way to generate investment and growth. Prior strategies since 2009 aimed at stimulating bank lending by massive central bank money injection have clearly failed in the Eurozone (as they have in Japan and the USA). Government and private debt levels have also continued to rise despite five years of monetary injections. So another way to ‘grow out of the crisis’ is being debated across the region. One element coming out of that ‘growth debate’ is that the Eurozone in general, and economies like France, Italy, Spain and others should expand exports in order to stimulate in turn new investment. But first wage and labor costs must first be reduced to boost exports. That’s where ‘labor market reform’ and labor cost reduction, i.e. ‘internal devaluation’, comes into the policy and new strategy mix now in development and roll out.

With Italy well on its way to implementing ‘labor market reform’ as a new form of Austerity, France is close behind but has not yet launched a similar labor policy. Pressure by Eurozone capitalists and elites across the region—especially central bankers—is now growing and demanding that France speed up the process. Indicative of this pressure are recent public statements by Jyrki Katainen, who will assume the role of vice president for jobs, growth, investment and competitiveness on November 1 for the European Commission. Katainen last week praised Italy’s new labor market reforms, declaring “it is a very good thing they are dong”. On the other hand, he criticized France, saying France should do more”.

The IMF, Germany’s government, and central bankers throughout the Eurozone have all added their voice, in a growing drumbeat of demands that France more quickly introduce serious labor market reforms and other structural reforms.

While France lags behind Spain and Italy in implementing labor market reform, French President, Francois Holland, has promised to announce labor market reforms, and broader economic structure reforms in France, later this year and early in 2015. Early indications are reforms will include proposals to deregulate various industries and to sell 100 billion euros of public assets—i.e. state owned companies—and to cut business tax cuts by 40 billion Euros.

France will also expand weekend and holiday shopping. That will mean more part time and temp work and possibly making workers work more overtime without being paid premiums for weekend and holiday work. Both would reduce general wage levels. Further reform announcements in 2015 will almost certainly include further reductions in pensions. At the same time, as in Italy and Spain, other prior forms of austerity apparently will continue, as France has indicated it will proceed with previously committed spending cuts of 50 billion Euros.

In the coming weeks and months, as the Eurozone economy weakens still further, it is likely that debates and splits within the Eurozone capitalist elites will continue to intensify. Some will argue still more central bank QE money injection is the answer to stem the new economic decline. Germany and central bankers will push back on this. Other new voices will continue to argue for more investment and government spending. But rising government debt levels and opposition to this by political forces in the European Commission, in Germany, and elsewhere, make the increase in government spending option unlikely. The ‘compromise’ new direction and new policy most likely to be agreed to by the different divisions within the Eurozone capitalist elite is the growth path initially pioneered by Spain and now being followed by Italy—i.e. export-driven growth via labor cost and wage reduction under the ideological cover called ‘labor market reform’. Exports to drive private, not government, investment. And still more labor cost reduction and wage compression—i.e. more ‘internal devaluation’—to drive exports

But boosting exports by labor market reform and wage compression raises the still deeper question of ‘who will they increase exports to? If the global economy—from China to Japan to Latin America, and even the USA in 2015 should it raise interest rates—continues to slow, as it clearly is now doing, who will buy the Eurozone’s exports?

Jack Rasmus

Jack is the author of ‘Epic Recession: Prelude to Global Depression’, Pluto Press 2010; ‘Obama’s Economy: Recovery for the Few’, Pluto, 2012; and the forthcoming ‘Transitions to Global Depression’, Clarity Press, 2015. His website is: http://www.kyklosproductions.com and blog, jackrasmus.com.