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Globalcrisis Unsereuni

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Vortrag 27.10. 18 Uhr: Özlem Onaran, Global Crisis and the policy reaction in Europe: Can policy save capitalism from itself?

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Globalcrisis Unsereuni

  1. 1. Global crisis and the policy reaction in Europe: Can policy save capitalism from itself? Full paper: http://www.wu.ac.at/arbeitsmarkt/staff/onaran/research/onaran_crisiseurope_fi1.pdf Özlem Onaran
  2. 2. What does the crisis have to do with the university politics? <ul><li>Commercialization & precarization </li></ul><ul><li>Education and science for the interests of the wealthy elite </li></ul><ul><ul><li>Standardization X pluralism </li></ul></ul><ul><ul><li>Domination of ideology </li></ul></ul><ul><ul><ul><li>“ free” market=efficiency? </li></ul></ul></ul><ul><ul><ul><li>Markets are not free=depend on the wealthy </li></ul></ul></ul><ul><li>Crisis=failure of neoliberalism </li></ul><ul><li>Alternative: </li></ul><ul><ul><li>self management=democracy=peoples’ needs </li></ul></ul>
  3. 3. Multiple crises <ul><li>Economic </li></ul><ul><ul><li>Inequality & Financialization = realisation crisis </li></ul></ul><ul><ul><li>Global inequality </li></ul></ul><ul><li>Ecological </li></ul><ul><ul><li>Sustainability: need for low/0 growth=unemployment & inequality under capitalism </li></ul></ul><ul><ul><li>Energy </li></ul></ul><ul><ul><li>food </li></ul></ul><ul><li>Political </li></ul><ul><ul><li>Ideological inconsistency: privatize the profits, socialize the losses </li></ul></ul><ul><ul><li>Unemployment and discontent </li></ul></ul><ul><ul><li>East: back to the crisis after 20 years of capitalism </li></ul></ul><ul><ul><li>Political alternatives/organizations yet to challenge the hegemony </li></ul></ul><ul><ul><li>space for radicalization; no immediate change but diverging degrees of mobilization </li></ul></ul><ul><li>debatable where the recovery will come from, even if the bottom of the recession were reached. </li></ul>
  4. 4. Outline <ul><li>Understanding the crisis </li></ul><ul><li>Western Europe </li></ul><ul><li>Eastern Europe </li></ul><ul><li>Policy reaction </li></ul><ul><li>There is an alternative </li></ul>
  5. 5. Global crisis 2007-? <ul><li>Capitalism‘s answer to its crisis in the 1970s: </li></ul><ul><ul><li>Deregulated global capitalism, neoliberal macroparadigm </li></ul></ul><ul><ul><ul><li>Goods, services, labor markets, finance, trade, capital flows </li></ul></ul></ul><ul><li>Pro-capital redistribution of income & power </li></ul><ul><ul><ul><li>“ race to the bottom” in labor share in both developing & developed countries </li></ul></ul></ul><ul><li>Realization crisis: too high rate of profit & exploitation </li></ul><ul><ul><li>Low consumption due to low wages: underconsumption; growth w/o jobs </li></ul></ul><ul><ul><li>Financialization: too low investment/profit; ‘downsize and distribute’ despite high profit; profit w/o investment </li></ul></ul><ul><li>Debt-led consumption & financialization </li></ul><ul><ul><li>US, UK, but also Netherlands, Denmark, Eastern Europe </li></ul></ul><ul><ul><li>Housing buble, mortgage debt, equity withdrawals: US, UK, Spain, Ireland </li></ul></ul><ul><li>Global imbalances↑; related to inequality </li></ul><ul><ul><li>Current account deficit in the US, Spain, UK, Eastern Europe </li></ul></ul><ul><ul><li>Low domestic demand in Germany, Japan, current account surplus </li></ul></ul><ul><ul><li>Developing countries accumulating reserves after the Asian crisis, China </li></ul></ul>
  6. 6. WAGE SHARE ↓ ( total wage bill/GDP) Profits are too high, and wages are too low: realization crisis Further increases in top income share and wage differentials: US, UK, Germany, Netherlands...
  7. 7. Wage share & unemployment in the Euro-area Wage share=total wage bill/GDP=wage*#employees/GDP=wage/productivity
  8. 9. Different countries, different crises: Western Europe <ul><li>fiscal capacity to better weather the shock </li></ul><ul><ul><li>policies that were denied to the developing countries! </li></ul></ul><ul><li>less severe at the beginning compared to former crises in the developing countries, but might persist & deteriorate </li></ul><ul><ul><li>+long recession ->L-crisis? </li></ul></ul><ul><li>UK deeper: dependence on financial sector, deleverage in the banking sector, housing bubble, household debt, deflation? </li></ul><ul><li>Continental European Banks: conservative at home, but compensation via purchasing CDOs of US banks </li></ul><ul><ul><li>Austria, Sweden, partly Greece: high exposure to the risk of credit default in the East as a ratio to GDP </li></ul></ul><ul><ul><li>Ireland: large financial sector/GDP </li></ul></ul><ul><li>Germany, Austria: fragility of neo-mercantilism, dependence on export markets, wage dumping (low domestic demand) </li></ul><ul><li>Spain: housing bubble bust, contraction of construction sector, deflation, shift from casual work directly to unemployment </li></ul><ul><li>Italy, Spain, Greece, Portugal: chronic current account deficits; historical failure of EU to mobilize regional convergence in investment and productivity; fixed exchange rate (€), Stability & Growth Pact; no industrial policy </li></ul><ul><li>High household debt also in Netherlands and Denmark </li></ul>
  9. 10. Eastern Europe: 20 years of capitalism <ul><ul><li>No more resilient to crisis: From transition crisis to the global crisis </li></ul></ul><ul><ul><li>dependent on capital flows: the decline in FDI inflows, the contraction in remittances, credit crash, portfolio investment </li></ul></ul><ul><li>A boom-bust cycle was unavoidable: It did happen again… </li></ul><ul><li>adjustment of current account deficits & appreciated currency, housing bubble, credit boom in Hu, Baltics, Bu, Ro </li></ul><ul><li>But slower building up of the currency crisis </li></ul><ul><ul><li>10-30% depreciation; Fixed pegs still holding in the Baltics & Bulgaria </li></ul></ul><ul><ul><li>But: is depreciation wave over? </li></ul></ul><ul><li>Reliance on mature market parent banks instead of markets? Parents cut lending </li></ul><ul><li>when & how will the recovery come? a global vs. regional crisis </li></ul><ul><ul><li>Global credit crash! </li></ul></ul><ul><ul><li>Export market contraction: Depreciation has only negative effects </li></ul></ul><ul><ul><li>Debt-led consumption growth –household debt </li></ul></ul><ul><li>Poland, Czech Republic, Slovenia, Slovakia (auto): contagion & recession </li></ul><ul><li>Is Euro safe? The appreciation of the € is a problem for Sl & Sk </li></ul>
  10. 11. <ul><li>Unprecented rescue efforts to weather the global economic slowdown </li></ul><ul><ul><li>Monetary: reductions in policy rates, quantitative and/or qualitative easing; </li></ul></ul><ul><ul><li>Financial: guarantee of private deposits, state participation via capital injections into banks, nationalization, buying of “toxic assets” etc. </li></ul></ul><ul><ul><li>Fiscal: new spending on public goods and services, tax cuts and transfers </li></ul></ul><ul><li>but „ bank lending continues to decline“ : weak government conditions </li></ul><ul><li>Fiscal measures have been relatively inadequate (ILO, Khatiwada) : </li></ul><ul><ul><li>32 countries (including the G20), the stimulus spending in 2009 accounts for 1.7% of GDP (< 2% recommended by the IMF.) </li></ul></ul><ul><ul><li>the biggest fiscal rescue packages (%of GDP: China, Saudi Arabia, US </li></ul></ul><ul><ul><li>Rescue packages were announced based on relatively optimistic forecasts </li></ul></ul><ul><ul><li>Financial measures have far outweighed fiscal measures: by a factor of 5 or more. </li></ul></ul><ul><ul><ul><li>comparison is imperfect because guarantees might never be used </li></ul></ul></ul><ul><li>Automatic stabilizers in the EU, particularly in the northern EU, are almost 3 times the fiscal stimulus plans </li></ul><ul><ul><li>still the US total fiscal stimulus including automatic & discretionary is above 10% , in Germany 6% . Only 4 EU countries exceed the US. </li></ul></ul><ul><li>no EU level reaction; divergences ?; vague declarations on sovereign debt </li></ul>Policy reaction: West
  11. 13. Policy reaction: East & the New IMF? <ul><li>Hu, Ro, La, Ukr, Belarus, Serbia, Bosnia-Herzogovina </li></ul><ul><li>Credit line to Poland -new </li></ul><ul><li>The EU connection - ECB extends support over the IMF </li></ul><ul><ul><li>Interets of the MNE, in particular banks to avoid a devaluation </li></ul></ul><ul><ul><li>Instead defend irrational pegs at the cost of deflation </li></ul></ul><ul><ul><li>Alternative: managed devaluation, price & capital controls </li></ul></ul><ul><li>IMF is trying to bail in the banks to maintain the level of credits in the countries that have an IMF financial program </li></ul><ul><li>Can IMF & ECB now make a difference? </li></ul><ul><li>Hungary, Romania, Latvia dramatic budget cuts </li></ul><ul><ul><li>Latvia: public wage cut by 35%, pensions by 10%, VAT rate increased from 18% to 21 </li></ul></ul><ul><ul><ul><li>to get the second tranche of the IMF package </li></ul></ul></ul><ul><ul><li>Estonia &Lithuania: at least 20% cut in public wages and a reduction in social benefits </li></ul></ul><ul><ul><li>Similarity to credit conditionality during the Asian or Turkey crisis </li></ul></ul><ul><li>Cz, Po, Sl, 1% Fiscal stimulus/GDP (OENB 09) </li></ul><ul><li>Russia >5% </li></ul>
  12. 14. The existing policies are missing the reasons <ul><li>Reason is not wrong interest rate, compare 60s & 70s vs. Post-80s </li></ul><ul><ul><li>Deregulation=higher frequency of deeper crisis </li></ul></ul><ul><ul><li>Pro-capital redistribution of income & power </li></ul></ul><ul><li>A new look at the argument of global imbalances: </li></ul><ul><ul><li>Declining wage share in AU, Germany, Japan, export-led growth </li></ul></ul><ul><ul><li>Low domestic demand =current account surplus </li></ul></ul><ul><ul><li>Developing countries accumulating reserves after the Asian crisis, China </li></ul></ul><ul><li>Debt-led consumption-led growth: worsening income inequality </li></ul><ul><li>Not easy to save capitalism from itself within the existing power structure </li></ul>
  13. 15. Alternatives <ul><ul><li>Employment </li></ul></ul><ul><ul><li>Public employment : Labor intensive public services (education, health, nursery, child care), Infrastructure, Green investments </li></ul></ul><ul><ul><li>Prevent firing : No firing in firms that can pay dividends and managerial wages </li></ul></ul><ul><ul><ul><li>If bankrupt, reappropriation by workers supported by public credit </li></ul></ul></ul><ul><ul><ul><li>Automative industry : socialize & restructure </li></ul></ul></ul><ul><ul><li>substantially shorter working hours with wage compensation </li></ul></ul><ul><ul><ul><li>Low growth, ecological sustainability, free public services (education, health…) </li></ul></ul></ul><ul><li>Tax the responsible : inequality has been the reason behind the crisis </li></ul><ul><ul><li>Wealth tax, heritage tax, higher corporate tax, progressive income tax, taxation of financial transactions </li></ul></ul><ul><li>Financial system: nationalization with democratic participation </li></ul><ul><li>public ownership integrated to democratic participatory plan (in key sectors , infrastructure, energy, health, education, care…?) </li></ul><ul><ul><li>workers, „stakeholders“ (consumers, regional represantation), transparency </li></ul></ul><ul><li>Capital controls, cancel the debt, global redistributive tax </li></ul><ul><li>Trade & industrial policy consistent with development </li></ul>
  14. 16. Alternatives - EU <ul><li>EU: Going beyond rescuing the Western banks: EU public investment programs for social cohesion & European integration </li></ul><ul><li>time to abondon SGP </li></ul><ul><li>EU level progressive tax </li></ul><ul><li>European Bank for Reconstruction & Development, European Investment Bank, Structural Funds </li></ul><ul><li>Convert foreign currency denominated debt to local currency at a reasonable exchange rate/ controlled devaluation / multiple exchange rates </li></ul>
  15. 17. <ul><li>Appendix </li></ul>
  16. 18. OECD September forecasts <ul><li>“ Despite stabilization in money markets, bank lending continues to decline and concerns about the health of the banking system remain. </li></ul><ul><li>global trade appears to have reached a trough and is poised to accelerate. </li></ul><ul><li>earlier recovery, but the pace of the recovery is likely to be modest for some time to come. </li></ul><ul><ul><li>Ample spare capacity, </li></ul></ul><ul><ul><li>low levels of profitability, </li></ul></ul><ul><ul><li>high and rising unemployment, </li></ul></ul><ul><ul><li>anaemic growth in labour income </li></ul></ul><ul><ul><li>ongoing housing market corrections </li></ul></ul><ul><ul><li>balance sheet adjustments in households, businesses, financial institutions and governments </li></ul></ul><ul><li>negative or zero headline inflation in all major economies until mid-year </li></ul><ul><ul><li>Substantial spare capacity and the collapse in commodity prices. </li></ul></ul><ul><ul><li>Given the recent rebound in commodity prices, the risk of sustained deflation appears to be small outside Japan. </li></ul></ul><ul><li>the prospect for a weak recovery implies that strong policy stimulus will continue to be needed in the near term. </li></ul><ul><li>normalisation of policy interest rates from their current exceptionally low levels should in most cases wait until well into 2010 and in some cases even beyond. </li></ul><ul><li>it is important that announced stimulus measures be implemented promptly. However, the possibility of a recovery diminishes the likelihood that further fiscal stimulus will be needed. </li></ul><ul><li>need to prepare for the removal of the exceptional degree of support afforded by current monetary and fiscal policy stances. credible exit strategies and fiscal consolidation plans now” </li></ul>
  17. 19. Rate of profit (total economy, 1960-2009) back to or higher than late 1960s AMECO EC DG Finance, net return on net capital stock
  18. 20. Sectoral differences in profit rates do not tell a very different story <ul><ul><li>EU Klems </li></ul></ul>BEA
  19. 21. Financialization & the distribution of profits ‘ downsize and distribute’ instead of ‘retain and reinvest’ Onaran 09 /
  20. 22. Financialization & investment: less investments/profit US 1960-2008 Onaran 09
  21. 23.
  22. 24. Current account deficit/GDP
  23. 26. Euroarea current account balances
  24. 27.
  25. 30. OECD forecasts
  26. 31. ...OECD forecasts
  27. 32. ...OECD forecasts
  28. 33. Growth in GDP, (in 2000 prices) Employment (total, 1000)
  29. 34. Real wage (compensation per employee, deflator private consumption, index 2000=100) Adjusted wage share
  30. 35. Unemployment
  31. 42. Crisis, distribution, and labor <ul><ul><ul><ul><li>policy measures in line with what the wealthy want: state as an economic partner; </li></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>t he bank rescue package without conditions. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>Profits were private, losses are socialized! </li></ul></ul></ul></ul></ul><ul><li>Contraction of output & unemployment </li></ul><ul><ul><li>decline in the bargaining power of workers </li></ul></ul><ul><ul><ul><li>First unskilled, temporary workers, but now also skilled </li></ul></ul></ul><ul><ul><li>An extention of income inequality </li></ul></ul><ul><ul><li>Some firms will use the crisis to legitimize their LR strategy </li></ul></ul><ul><ul><li>Wage concessions to avoid job losses </li></ul></ul><ul><ul><li>Unions: Bargaining the terms of firings </li></ul></ul><ul><ul><li>Short-work arrangements: wage compensation via workers solidarity (public budget) </li></ul></ul><ul><li>Persistence of the decline: hysteresis effect </li></ul><ul><li>Export-oriented countries‘ (e.g. Germany, Austria) curse: Export dependency & low wage strategy </li></ul><ul><ul><ul><li>In the short run wage share may be stabile: low inflation; declining productivity ( counter-cyclical wage share) </li></ul></ul></ul><ul><ul><li>But Japan: radical restructuring in labor law and wage bargaining in the 2000s, eventually 10% decline in the wage share </li></ul></ul><ul><li>The finance of the package : future cuts in social expenditure, education, health, childcare, elderly care, manucipal servies, infrastructure </li></ul><ul><li>East: Nominal depreciation & currency crises </li></ul><ul><ul><li>Inflation? Lower than in previous crises? </li></ul></ul><ul><ul><ul><li>is depreciation wave over? </li></ul></ul></ul><ul><ul><li>As of now no real wage deterioration except for Baltics and Hungary </li></ul></ul><ul><ul><ul><li>Yet! </li></ul></ul></ul>
  32. 43. Japanese Slump <ul><li>Differences to the developing countries: </li></ul><ul><ul><li>Deflation, not inflation </li></ul></ul><ul><ul><li>the duration and the size of the shock: </li></ul></ul><ul><ul><ul><li>developing country crises: the recession is very deep, but often one year long </li></ul></ul></ul><ul><ul><ul><li>the Japanese slump: the initial shock to growth was moderate, however the recovery took more than a decade. </li></ul></ul></ul><ul><ul><li>wages </li></ul></ul><ul><ul><ul><li>developing country crises: sharp decline </li></ul></ul></ul><ul><ul><ul><li>the deflationary crisis: moderate real wage declines or even some minor increases particularly in years of deflation. </li></ul></ul></ul><ul><li>However, the cumulative effect is in both cases a dramatic pro-capital redistribution </li></ul>
  33. 44. Japan
  34. 46. FDI Myth <ul><li>FDI is still more robust than the other capitalflows, but in Q12009: 20-80% fall in inflows, the level of 2001-2002 (WIIW) </li></ul><ul><li>Current account deficits are also falling </li></ul><ul><ul><li>lower imports due to recession </li></ul></ul><ul><li>But FDI is now financing a declining part of the deficits </li></ul><ul><li>FDI not only finances but also creates current account deficits </li></ul><ul><li>Average repatriation rate of profits: 70% </li></ul><ul><li>FDI inflows are either only as large as or even less than the repatriated profits in HU, SK, CZ </li></ul>
  35. 47. Keynesian policy? <ul><li>Not Keynesian, Keynesian would be </li></ul><ul><ul><li>A wide program for stimulating investments through public initiatives or incentives to the private sector </li></ul></ul><ul><ul><li>Regulation </li></ul></ul><ul><ul><li>Capital controls and fixed exchange rates </li></ul></ul><ul><li>Not easy to save capitalism from itself within the existing power structure </li></ul>