EU Commission says falling labour remuneration leads to deflation and damages growth prospects

Visit by László Andor, Member of the European Commission in charge of Employment, Social Affairs and Inclusion to Bilbao, where he participated in the inauguration of and Signing of the OSHA Seat Agreement. (L-to-R) Pedro Llorente, Spanish Deputy Secretary for Employment and Social Security, Dr. Christa Sedlatschek, Director of EU-OSHA (The European Agency for Safety and Health at Work ), and Laszlo Andor. (EC Audiovisual Services 31/03/2014).

The social situation in the European Union keeps degrading and in many countries it has compromised the social cohesion. Yesterday the EU Commission published its quarterly review on “Employment and Social Situation”, with the unbelievable conclusion that, “The recent economic recovery has not yet been able to create new jobs and the social situation in the EU shows little signs of improvement so far”.

What kind of recovery is this?

The problem is that the economic recovery the Commission sees in Eurozone is rather a fictitious construction, unless a 0.1% increase of GDP can be called ‘economic recovery’. Eurozone was for four years in a downwards spiral of recession. At the end the sliding was arrested during the second quarter of 2013 with a 0.3% increase of the GDP. Then, in the third quarter of last year, growth retreated to a merely positive 0.1%, to crawl again back to 0.3% during the last three-month period of October-December. Not to forget that all those decimal points are well into the area of the statistical error and, as reality shows, this must be the case. The constant worsening of the social situation stands as an infallible witness to that.

Of course, the EU Commission could not avoid recognizing the real degradation of the EU’s social structures. Despite asserting that the Eurozone economy has managed to recover, European Commissioner of Employment, Social Affairs and Inclusion László Andor couldn’t avoid telling the truth. And the truth is that the employment and social situation in the EU has worsened and will keep on worsening in the foreseeable future. Not to forget that in less than 50 days the EU citizens will go to the polls and very probably will punish those who lie.

Down to reality

Having all that in mind, the Commissioner had to come to terms with the reality. So he said, “The EU economy has returned to growth at a slow pace but the situation of many households and individuals is not yet improving, with ever growing numbers suffering from financial distress. Inequalities have risen and there is a risk that the current fragile recovery is not going to improve the situation of many lower-income groups. The EU is still far from having secured an inclusive and job-rich recovery”. Everything that Andor said is quite true at the exception of the return to growth.

A good explanation why the Commission keeps insisting that Eurozone is in a growth path could be that it cannot support the opposite. For nine months now Eurostat has stopped publishing negative statistics about GDP. This is a good base for the Commission to argue that Eurozone has exited recession and is recovering. It also helps capital markets to gain some ground.

The truth remains though, that labour market conditions continue to deteriorate. The Commission’s Review notes that “January 2014 show that unemployment is still at record high levels…In several Member States, unemployment remains close to the historically-high levels first seen in the current crisis”. The Review also found “increasing use of temporary and part-time work. There is evidence that temporary employment has become less of a stepping-stone towards a permanent job since the onset of the crisis. At the same time, job stability has decreased significantly, especially for men and the young, and divergences between Member States became more pronounced”.

Increasing poverty

However, the Review fails to note that even in the theoretically exemplary country, Germany, the part of population at risk of poverty has increased greatly during the past few years from 12% to close to 18%. The German ‘discovery’ of petty-jobs has gained grounds in this country and the inability to support a family for people with a job grows fast. In other core countries like Holland and France unemployment is still rising despite a decimal growth of GDP.

As expected, the employment situation is reflected on incomes. The Commission’s Review states, “The income that households have at their disposal is lagging behind the growth in Gross Domestic Product (GDP). In 2013, the real Gross Disposable Household Income (GDHI) continued to decline year-on-year in the Euro area in real terms, though at a slower pace than before. Another worrying trend is the continuous increase of financial distress since 2010, with more and more of the population reporting the need to draw on their savings and, more recently, even to run into debt to pay for everyday living costs. Households with the lowest income are those hardest hit: 10% of adults in low income households are forced to run into debt and a further 15% must draw on savings to cover current expenditure (compared to 5% and 12% for the total population)”.

Impediment to growth

After all that, it is quite natural that poverty and social exclusion marked a further increase in 2013, for those countries where economic and labour market conditions have continued to deteriorate. However, the worsening conditions for large parts of the population doesn’t only hurt those affected. It undermines the overall effort of Eurozone to regain a sustainable growth path. On this issue the Review is pretty clear. It points out that “Related to high unemployment and job instability, the rate of growth of nominal unit labour costs has continued to slow down in the euro area in 2013, increasing the risk of cost-push deflationary pressures that could damage prospects of a sustained recovery and the accompanying creation of jobs”.

In plain English, this means that the German ideology, favouring austerity, is undermining the growth prospects of the entire economy just by condemning wage earners to continuous financial distress. Even in Britain, the conservative government of David Cameron recognized that and substantially raised the minimum hourly wage. In this way, Britain abandoned the labour cost competition with the developing world. It becomes clear that, when it comes to labour costs, trying to compete with China, as suggested by many, cannot help the western economies regain a sustainable growth path.

All in all, Europe has to change economic policy mix and return to home generated growth, through increased consumer confidence and spending, solidly based on sustainable wages and salaries increases. Understandably, exports will continue to also support Europe’s GDP but the internal economy would take over as main growth engine.