Class War: Low Wages and Beggar Thy Neighbor

HEINER FLASSBECK: I’m going to go straight
into the core of the matter and touch some of the things that have been mentioned this
morning by passing, but not going into it so much. The question that we have been asked
is why these problems in the eurozone, and I think there we have to go a bit deeper into
economics. Why this problem in the eurozone? And let me first say what many people do not
understand, why we do have a currency union in the eurozone or in Europe. This is one
of the core questions that we have to answer before we come to why we have a problem in
that eurozone, in that monetary union, in the eurozone. We have to answer the question,
was there a rationale for going into a currency union. And I think, yes, it is. Some people
say it was purely for political reasons and so there was no economic rationale. I think
that’s wrong. What happened before we went into the eurozone, so into the monetary union,
was that we had a strange arrangement in monetary affairs in Europe, which was an arrangement
where many countries absolutely fixed the exchange rate to Germany, to the D-mark. The
D-mark was clearly the anchor of that system. So they fixed the exchange rate. Austria,
for example, [incompr.] fixed its exchange rate forever. It had never changed its exchange
rate after the Bretton Woods system collapsed. So, immediately, the Austrian schilling was
pegged to the D-mark and never changed. And many other countries followed, for the very
simple reason that they didn’t want to have, let me say, be blunt–and my French colleague
will not fully agree, but let me say it like that–they didn’t want to have high inflation
anymore. They wanted to be as successful as Germany, not only in terms of inflation, but
also in terms of inflation. And inflation was, so to say, the medium, the means by which
they thought they could get as successful as Germany. And in this arrangement, only
one thing is really a bad institution or is a bad setting, so to say, namely, that you
have–in such an arrangement that could go on forever, you have all the advantages of
trade, you have to exchange money. But what’s the matter if I go to Austria and change my
D-marks into schillings and back to–at a fixed rate? It’s nothing. So that is not important.
Important is, in such an arrangement, that you have monetary policy that is monetary
policy of the anchor country and nothing else. It is monetary policy of the anchor country.
And you want to go a step further, you want to go step further, so not stay with the Argentinian
arrangement, where you have fixed your exchange rate unilaterally to the dollar–then your
monetary policy is American monetary policy, but you have no influence on that policy.
If you want to go a step further, then you have to go into something like a monetary
union, because this gives you only the seat, the seat in Frankfurt. Who mentioned the seat
in Frankfurt? At least you have a seat. Whether it’s used or not is a different question,
but you have a seat. And this was a big achievement. It was a big achievement to jump from an anchor,
purely anchored system, vis-a-vis the D-mark, into the eurozone, because that gave Austria
and the other countries a seat and a voice in the system. And that’s an achievement.
And there’s no way back, no simple way back, to, say, do it with flexible exchange rate
and such things–I don’t want to say nonsense, but it is nonsense in my view. And if you
look around the world, you see how badly flexible exchange rate work and how much distortions
they create. And we have–just in the G-20 this year, we had a long debate about that.
I do not want to go into that. So what happened? Why did it go so wrong? What is so–monetary
union is a union of countries that want to have the same inflation rate, but not only
for one moment of time, but forever. That’s the critical thing, hmm? They want the same
inflation rate not only for the year 1997, when there was a criterion that you should
reach, so to say, the German inflation rate of 2 percent, but forever. And this is the
critical thing. And there we look briefly into the matter and we see–. So what happened
is very simple. Namely, what we have is we have different inflation performances in this
currency union. We have Southern Europe. And, by the way, it’s not a big problem, huh? The
problem in Europe has nothing to do–well,nothingis an exaggeration, but close
to nothing with Greece. Greece is just one of the countries in this blue line. And this
blue line, the countries in Southern Europe, including Italy–and you see the name Greece,
Italy, Portugal, and Spain. These countries had inflation performance in the last ten
years–this is all from ’99, from the beginning of the currency union–of something like 2.6
percent. That’s not bad, huh? If you have 2.6 percent, it’s not an accelerating inflation
or a big problem. You see, one country got it absolutely right, if you take the target
that we had in this monetary union. [incompr.] the target was exactly 2 percent. It was the
German target. The old German target was the target for everyone in Europe, and there was
one country that got it right, namely, France. Hm? France was very much criticized, but France
was the only country that got it right. They were exactly on the target. And the whole
of the European Monetary Union was also on the target. You see? The EMU as a whole was
absolutely on the target. But one country got it absolutely wrong, more wrong than anyone
else. One country got it more wrong than anyone else. And that country was not Greece. It
was Germany. That country is Germany. They got it more wrong–the deviation of Germany
from the inflation target, if you look at the end in 2010, is bigger than the Greece
deviation from the target. So what did we have? We had an arrangement, we had an institutional
arrangement that said you should reach an inflation target of 2 percent, and the country
that most violated this arrangement–. It was a common arrangement. Everybody agreed
about 2 percent, not below 2 percent, but 2 percent, for many reasons that I do not
want to go into. All the country agreed to it, to the 2 percent. But Germany deviated
more than anyone else. And if you deviate downwards, it’s as bad as if you deviate upwards,
because there is no rule to say the one is worse than the other. What you only–the only
argument that we have is that deflation is worse than inflation, so it was–it’s even
worse. Behind this was the inflation target. I don’t want to explain this further, but
it could be shown very clearly. Behind this were deviations in what is called unit labor
cost. And unit labor cost is the deviation of your nominal wages to your productivity,
to the national productivity. So what is asked for: that you have nominal wages that rise
in line with productivity plus 2 percent in all countries. That’s a very simple rule.
And I was–when I was deputy finance minister in Germany, which I was for a short time,
I tried to impose that rule on all European countries. And we even created an institution,
which was called Macroeconomic Dialog, to do exactly that, namely, to give countries
guidance in imposing such a rule. Again, the only country that got it right was France.
In France, wages were rising–at least, they were rising. Maybe just statistics that were
wrong, but as far as we believe in statistics, France got it right and the real wages were
rising with productivity. That’s the rule: your real wages should rise with your own
productivity, not with the productivity of Germany or something like that. That’s nonsense.
With your own productivity. So you have to live according to your means, not above your
means, but not below your means. You should live according to your means. That is in the
core of the matter what a currency union asks. And that’s not very much, hm? That’s not such
a big thing, to get that every country adjusts, given the inflation target, to its own means.
That you have to do anyway. In the end, you have nothing else but your means. You have
your productivity and nothing else. So the United States have to adjust to their means.
The only question is how they distribute their means. That’s a different question I come
to a bit later. So what happened and why was this now? Why did this happen? Was it, so
to say, an idea by Germany to say, now we have the currency union, now we can exploit,
so to say, our new–not our–it was not German traditional policies, but new belt-tightening
policies to gain market shares in Europe? Well, some people may have thought like that.
I think in the German industry community there were surely some people who were in favor
of the monetary union because they thought this is right. But the most–for most of the
people, including most of the people in the government, this was not the crucial point.
The crucial point was quite different and totally independent of the euro. And so far
this is the tragic and–the tragedy of the situation, that Greece is now collateral damage
of the euro. But the euro itself is collateral damage of something bigger, of a much bigger
fight that took place in Germany and that’s taking place every day elsewhere. What is
that bigger fight? Well, the bigger fight was that at the same time, or a bit, even,
before the euro was installed officially, the German government, including the Social
Democrats and including the German unions, which were at that time still quite strong,
decided to go for a unique historical experiment, for a unique historical experiment. And that
experiment was called: we cut the wages, we do not raise real wages in line with productivity
anymore, as we have done 40 years before, to bring down our unemployment rate. This
coincided with the euro. I can tell you I was in the first red-green Social Democratic
Green government, and although I was fired rather soon, when my minister, Oscar Lafontaine,
left, but even at that time, nobody–nobody–in the German government thought about killing
the euro or something like that. Nobody thought about killing the euro. But they all thought
to bring down German unemployment, because Germany was really in the worst situation
of all countries. It had the lowest growth rate. It had the highest unemployment. Unemployment
was rising. And so they took a desperate measure to bring down the unemployment. Unfortunately,
the whole experiment failed or–well, it did not fully fail, but it failed to a certain
extent. And this is extremely important to understand. It’s extremely important to understand,
for economists in particular, what happened there. What happened was that two mechanisms
came into play. The first mechanism was that due to German wage cutting, with given productivity–productivity
went on rather unchanged–with given productivity, Germany started into a beggar-thy-neighbor
experiment. And this is what you see here. All products that were at EUR 100 in 1999
are now–have now a cost or a price of EUR 107 in Germany and EUR 133 in Southern Europe,
and EUR 117 in France or EUR 120 in France–oh, a bit more than EUR 120. By the way, that’s
why France has positioned itself on the wrong side. That is the main mistake of Mr. Sarkozy.
He has never understood where he should have sided. He should have sided with the Southern
Europeans, because he is as much in trouble as the Southern Europeans, because if the
French products all cost EUR 125 and the German cost EUR 105, forget about France. It will
be wiped out, as the others (it takes only a bit longer), if we do not change fundamentally
this system. If this system is not changed, you can be absolutely sure–I do not want
to go into showing you the figures of the trade flows–it can be shown crystal clear
that this system sooner or later wipes out the export industry of all the countries that
are north of Germany, all the countries that are north of Germany. And so far this is absolutely
unsustainable. But, again, coming back to why was it–what was the second channel, so
the first channel that Germany relied on, namely, the channel through export, was absolutely
successful, and this everybody could have told. I mean, every good, let me say, Keynesian
or Kaletskian or such kind of economist could have told you that this is one channel that
would happen. If you have one big country that tightens its belt dramatically, forces
wages to remain below productivity, and there is no reaction on the currency side, there
is no appreciation of the currency of that country, [it] would be a winner in the competition
of nations and would gain huge current account surpluses. There’s no doubt about it. But
the other channel–and this is the critical thing–. Unfortunately, I do not have the–I
only have the trade imbalances; I do not have the other chart here. The other channel, namely
the channel that was mainly thought to be the important channel for the good-willing
part of the German people, who thought we are going for this unique experiment of wage
cutting, the other channel did not work out at all, and that was the neoclassical nexus,
that you cut real wages, and through the cutting of real wages you change the production structure,
you reduce productivity, and through the reduction of productivity you employ more people, you
work more labor-intensive than before. This did not work out at all, and it can be shown
that it didn’t work out at all, because what happened at the same time when German exports
exploded, German domestic demand was absolutely flat. It remained absolutely flat over the
last 15 years. So the exchange of wages against the trade-off of wages against domestic demand
never happened. It was just a beggar-thy-neighbor strategy and nothing else. And this is the
crucial thing to understand, because here we come to the question [of] how this can
be settled. I do not want to go into that. My time is over in a minute. But the point
is, if you go for such a strategy and you do not have the neighbors that are, so to
say, accepting your economic imperialism–for a time, at least, till they are bankrupt–and
that is where we are now–till they are close to bankruptcy, then you have no chance to
go for such a strategy. And that is the important thing behind this, because what we have, the
big battle that we have in this world is not between Germany and the other Europeans, is
not between South and North, China and Germany, or so. The big battle is still, believe it
or not, the battle between labor and capital. This is still the big battle. I know it’s
fashionable in the United States toa prioridismiss arguments by calling them a class
warfare argument, hm? Republicans like that very much, to say this is class warfare. I
tell you, what happens in this world is class warfare, because what we have–look at the
United States, my last sentence. What happens in the United States right now? For the first
time, if you look at U.S. statistics carefully, for the first time in history, in the modern
history since the Second World War, we have two years, we are two years in a recovery,
and in the United States the wages, the nominal wages, the nominal wages are rising by absolutely
zero. They’re not rising at all. We have for the first time not only a jobless recovery–that’s
a normal thing. For the first time, we have in the United States a wageless recovery.
Wageless recovery. And that is exactly what Germany did 15 years ago, wageless recovery.
And I can tell you how this experiment will going to end, because in the United States
there is no market that they can occupy, there are no markets and no partners that they can
exploit, there is no currency union that they can use. The experiment will end in disaster.
It will end in disaster because if you do not have a regime that allows the systematic
participation of workers in the productivity increase–and this happens for the first time
in the United States [incompr.] not at all there. And this is what the people are talking
about when they talk about 99 percent. But it’s worse than ever. It was worse already
ten years ago, but now it is worse than ever. And if you have such a regime, capitalism
hits a wall, it hits dramatically a wall, because no economy can grow successfully if
the people only have to rely on bubbles that sooner or later burst to consume, and if they
do not, can expect that they will participate in the success of all. Thank you very much.

35 Replies to “Class War: Low Wages and Beggar Thy Neighbor”

  1. Too bad the policy started 30 years ago! Better late than never? Isn''t the public too dumbed down for math and economics or even any meta-level thinking nowadays?

  2. Guys at the real news…..fuckin change this stupid title. This presentation is really good, but if i share it on facebook all my conservative friends will ignore it simply due to the title.

    Why would we want to preach to the quire?

  3. The aphorism -"To each, according to his merit" (19th century)
    morphed into
    -"To each, according to the work he has accomplished" [20th century up to 1980 — (actually 1971, but that's a long story..;-)]
    and THEN
    -"To each, according to the salary his work deserves…according to the markets…". (from the 80's to this day..)

    Pretty neat evolution: Glenn Beck is worth more then Paul Jay …so we know it's earned and thus his contribution to society is that much greater…works like a charm…

  4. There will always be a class war if there is a divide between owners of capital and labour. Luckily we are doing away with the labour factor in the equation and with it the owners. Capitalism and all other 'isms' requiring money and markets are being phased out by technology. You don't have to agree with me, it's happening as we speak, whether you like it or not. Money and markets are obsolete. The class war is obsolete. Embrace the future or shut up and get the hell out of the way.

  5. deflation is not worse then inflation. This is an attempt to make Greece look good for doing bad. And blame Germany for doing the right thing. Can't wait for the Euro to finally fail.

  6. by what process did the german government reduce the wages of the population? Did they reduce the minimum wage set by law? Did they increase taxes? Print more money? HOw?

  7. A german being dismissive of US Republicans is very gratifying. It's not just the "radical left" who thinks they are a bunch of clowns.

    Another way of defining "Class Warfare" is not only Capital vs. Labour, but Money Power vs. People Power. If you frame it that way, I believe americans would understand it better.

  8. @Austyg You sound angry at the notion that you may lose the society that has brought you war, corruption, ecological degradation, poverty and famine? Instead ask yourself, "how will the current system deal with planned obsolecence, and technological unemployment?" When you realize it can't… you'll realize the inevitability of the demise of money/market systems. When it happens, you'll look back on these days and scratch your head as to why you thought it was so good. 😉 Peace.

  9. @Austyg Also, note that I said that money and market systems are becoming obsolete. When they are obsolete why did you automatically continue to assume that corporations will be pumping out goods and selling them for money? The answer is, there won't be any corporations, and there won't be any price tags. Now ask yourself, "Do I really believe that a society like this is impossible?" If you answer yes, then there is no point in further discussion. If you answer no… good for you.

  10. @Austyg Well if you talk to people from Germany, all of them say that life actually got much harder since they've joined Euro. Dr. Flassbeck had just explained why.

  11. @OldSchoolSkill Sometimes they do. Like in 1889 and after, and in 1917 and following years. The rich might lose not only all of their wealth, but they lives, too. My guess is, that's why (among other things) the rich in Europe were much more willing to accept higher taxes, etc.: they remember what can happen if revolution erupts.

  12. @elbowbiter1
    "Time will become the new currency. People will stop aging at 25, and they "will have to earn their time ont his planet or die3 instantly this is true darwinism!! survival of the fittest!!! this is the law of nature, and human civilization should emulate it not protect ourselves against it!!!!!! muwahahah the libertarians win in the film "InTime"" –SomeSarcasticDouche

  13. @OldSchoolSkill Doesn't everyone deserve to earn money just because they have money? Why not the rich? Also members of the "rich" class go broke all the time. Completely, belly-up broke. There are protected members who are not allowed to go broke, for example, the elite bankers of today.

  14. @Austyg I like your black and white thinking my friend. We are schooled in this society to believe that if a society is fundamentally different than ours it must be a rabid murder-a-thon and we have a knee jerk reaction to site examples of scieties gone wrong. Furthermore, Pol Pots society had something in common with ours: Money and Markets. Try to imagine a technologically advanced society with out (money & markets) and you'll be closer to the mark. Peace Austyg.

  15. @lordblazer Hah, yeah that movie frustrated the piss out of me. Not too many flicks paint the future in a positive light. If I had a say in how that script was written it would have been about how in that type of society those that liver forever can't reproduce (a way more likely scenario). The Logon's Runish part could revolve around how the main character decided to have a kid and stay immortal. At the end, he would die, and the moral of the story would be: having kids is selfish.

  16. @elbowbiter1
    nothing is wrong with having kids… It kinda is what makes us well a living and surviving species. The thing about that society is that it is well prettty ass backwards, but it is a direction I see this society going. Not the whole Time being currency, but the general more mainstream acceptance of libertarianism as if unregulated capitalism hasn't been done before when it clearly has been done before. A lot of people have no understanding of history or what's beyond their face

  17. @elbowbiter1
    it is pretty ass backwards because you think that we would've had some colonies in space. so now using time as money i wouldn't think that is possible. its kinda a sadistic system. Anyway if applied in real life it wouldn't work.

  18. @lordblazer "nothing wrong with having kids" Yes at present it is a necessity. However, given that there are people out there starving to death… chosing to have children puts additional burden on resources that aren't getting to everyone. In essence it is stealing. Granted, the money/market system requires people to needlessly starve, but all things being equal, adding one more mouth to feed increases the burden on the system. Having kids is a selfish act, it might be amoral too.

  19. @Austyg true but the difference is we have a money/market middle man between us and those resources. Google it for links to better info describing what it looks like.

  20. I cannot understand how fashion can be taken into account when talking about politics. Why are words like communism or class-war so useless now as you cannot pronounce them in a political discussion if you want to be taken seriously. I am not stating a fact, I actually want to know if someone has any idea about the ridiculous relationship between politics (i.e. the way power is distributed and its ways) and fashion.

  21. What we have in the Western Civilization is Crony Capitalism. The Capitalists want socialism for themselves, and capitalism for lower classes.

  22. So not having inflation is just as bad as having inflation? When there is no inflation, you can save your money without exposing it to risk, but when there is inflation, you need to "invest" your savings and expose them to risk just to keep the same purchasing power. This is the main point that the inflationists miss. Inflation also encourages debt because of the value of future payments.

  23. Dr. Heiner, I think you are just fantastic. Fantastic in understanding the issues and even more in explaining them. I am only sorry that this lecture was so short, I could be listening you for hour. Thank you for sharing your knowledge.

  24. Hello,
    you seem to be forgetting that when you have inflation the bank pays interest for your money (in a savings account) that covers for the inflation. So there is no loss or risk there. In deflation the economy tends to a stop because you and all around you knows that you can buy a certain item a day, week or month later cheaper than today. So no sells from stores, no production from factories and no jobs for the people.

  25. Bank accounts rarely pay interest and even when they do, it's below the rate inflation. Falling prices, which is different than deflation, encourages buying and you can see this in the electronics industry. Chips get twice as dense and half the cost every 18 months, yet the industry is healthy.

  26. All this is linked to global warming. The system will either have to undergo serious revision or the planet with basically kill us all.

  27. Love this video and Dr. Heiner Flassbeck. He explains the macro economic aspects of the lack of recovery in the US and Eurozone so clearly. Thank you for uploading.

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