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currency, Europe, Eurozone, France, monetary union, Politics, Uncategorized, welfare

Behind the Macron reforms: the Euro!

By Jacques Sapir

While the first round of parliamentary elections is now fast approaching, while the polls promise a large majority to the President and his party La République en Marche, various leaks concerning the labour reforms that will be decided this summer are beginning to raise a legitimate emotions [1]. Indeed, in addition to the method used – Presidential decrees – it is the content of these reforms that poses the problem today. These reforms are coherent with the European, and even European, choices of the President. In fact, it is precisely the question of the European Union and that of the Euro that dominates these reforms. The opponents of President Macron and his party will soon face a real question of coherence. Either they accept the presuppositions of the President, and thus they will struggle to challenge these reforms, or they will oppose in a coherent and consistent way the premises of the latter, and they can then articulate a genuine criticism of Macron’s labour reforms.

The reforms to come

What are these reforms? The government is unclear on this issue, and denies, in whole or in part, the revelations that have been published in the press in recent days. But, on the other hand, these same revelations wholly follow the logic of the declarations made by Emmanuel Macron before his election.

The main point is certainly the abandonment of national rules, or even of sectoral rules in certain parts of the economy, to give priority to company-level agreements. These company agreements could decide the reasons for dismissal, the level of wages, working time (and therefore overtime) or leave the company the option of using fixed-term contracts (CDD). In effect, this would lead to the creation of an “à la carte” Labour Code for the employer. In addition, redundancy payments would be capped. These agreements could, without requiring trade union agreement, be submitted directly for the approval of the employees of the company. Similarly, a major reform of unemployment insurance is planned leading to so-called “universal” coverage.

But it is a reform that, according to the OFCE think tank, will result in lower unemployment benefits. Indeed, the benefits of all the people with a break in employment, for example with a few days between two fixed term contracts, would be cut. This decrease could thus potentially affect between 20% and 50% of job seekers – its magnitude depending on the parameters chosen, parameters that are not yet fixed [2]. Finally, the government plans to eliminate part of the social security contributions (which would technically increase take home wages) funded by an increase in another welfare tax, the contribution sociale généralisée  (CSG), which is now estimated to generate around 21 billion Euros, or 1% of GDP, and which would be paid by better off pensioners – whose pension exceeds 1,200 euros [a month]

If implementation by decree works, then these reforms could be adopted as early as September 2017. These reforms, as one can see through the projects that have been leaked in recent days, considerably aggravate the already very harmful labour law called the Law El-Khomri.

Reforms that will not solve anything

Beyond the sleight of hand on the social security contributions, it is clear that all these measures tend, on the one hand, to weaken the position of employees towards employers, and this is the product of the logic of negotiation at enterprise level compared to [sectoral / national level ] collective bargaining, and on the other hand to lower the level of wages. The consequences of these reforms could then turn out to be dramatic for both employees and businesses.

The weakening of the position of employees arising from the fragmentation of negotiations undertaken at company level will have important implications for working conditions, which have already deteriorated in recent years. The possibility that companies can determine the legal duration of working time will lead to a reduction in overtime, which in turn will lead to a fall in wages for employees. The possibility that companies can set the grounds for dismissal and the ceiling on compensation in the event of unfair dismissal will allow companies to blackmail workers and reduce wages (given the existence of a large pool of unemployed) and thus lead to the deterioration of working conditions.

These measures, which will obviously be profitable for companies and their shareholders, will result in a reduction in effective demand in France. Demand will also be curtailed among our neighbours, from Germany to Spain, passing through Italy and Portugal. While corporate profits benefit from these reforms, the general level of activity will decline. Indeed, the volume of production depends on expectations of demand, and their movement is either upward or downward. If companies anticipate a stagnation or even a contraction of this demand, they will use the means created by these reforms to lay off more workers. This wave of reforms that the government and the President intend to implement quickly will increase profits but reduce demand, resulting in further redundancies which will in turn reduce demand, leading to more redundancies and so on. The government, faced with this situation, will certainly propose new reforms, further aggravating the situation, in early 2019 …

Behind these reforms, is the shadow of the Euro and the European Union

Nevertheless, these reforms appear to have a justification. The minimum wage differentials within the European Union are enormous [3]: from 9 to 1 between France and Romania and Bulgaria, from 3.5 to 1 between France and Poland, Hungary, Czech Republic and Slovakia, from 2 to 2.5: 1 compared with Spain and Portugal; the French minimum wage is 10% higher than that of the United Kingdom and Germany, but moreover the latter countries have provisions which allow companies, under certain conditions, to hire paying workers under the legal ceiling. This applies only to countries with minimum wage legislation, which is not the case in Italy and Finland. Of course, the fact that labour productivity is particularly high in France partially offsets these differences. But only in part.

In the case of the “single market”, but also the total freedom of capital, large companies can develop in countries where labour costs are very low, factories whose productivity is rapidly approaching that of factories in France. Therefore, the first observation is that the ‘single market’, which is one of the pillars of the European Union, produces a logic in the EU of the ‘less expensive’. If companies benefit from this race to the bottom, employees are of course the first losers. The logic of the “single market” could, however, have been offset by exchange rate movements, resulting in a revaluation in countries with low costs and a depreciation of the currencies of countries where costs (corrected by productivity) are high. But such a mechanism cannot exist under the single currency. The Euro prohibits any change in exchange rates. In addition, inflation rates are quite different between countries in the Eurozone. As a result, the Euro has also led to a 20-25% gap between Germany (which is the biggest beneficiary of the Euro) and France. The result is this: you cannot adjust exchange rates to correct major imbalances, you can only cut wages. Such is the logic, barely hidden, of the reforms proposed by Emmanuel Macron and his Prime Minister Edouard Philippe.

Why is “internal devaluation” a dead end?

It will be said, however, that if all prices (which are costs for businesses and consumers) can be lowered, then the decline in (nominal) wages could be at constant real wages. This is called an “internal devaluation”, as compared to what happens when a country depreciates its currency. It is this argument that the government is trying to sell to us. On the one hand, there are costs (and prices) that are fixed and do not depend on the government: rents (for businesses and households) and financial costs. On the other hand, there are prices (or costs) that adjust much less quickly than wages adjust. That is why all – and I mean all – attempts at internal devaluation have always been much more dramatic. Why? The reason is simple to understand. A depreciation of the currency amounts to depreciating the unit of account of a country in relation to the other countries. As a result all prices (and all costs) are depreciated instantly compared to other currencies. There are no longer fixed prices, or prices that adjust slowly.

But it may be objected that the prices of imported products increase. That is true. However, what does this increase represent? On the one hand, over 50% of household spending is linked to purchases of goods and services manufactured in France, which do not change. In other words, in terms of the budget of a household, if the “Franc” depreciated by 10% the increase in costs would be only 5%. But, again, this is too simplistic a reasoning. In fact, there is a process of substituting so-called “national” productions for imported productions. Let us take the example of Russia, whose currency depreciated 45%-60% between the end of 2014 at the end of 2016. If we calculate the rise in inflation induced by this depreciation (knowing that Russia had stable inflation rates of 6.5% per year), it is found that over 3 years prices rose by 16% in total. In other words, the ratio between the depreciation of the currency and the rise in prices over three years was 3-4: 1.

So if we apply this to a depreciation of the “Franc”, in the event of Euro-exit, by 10%, this means that the total inflation induced by this depreciation over a three-year period may only be 2.5%- 3.3% in total.

 The choice of these legislative elections

We can now summarize the arguments.

  1. The reforms that Emmanuel Macron wants to impose, if he obtains the majority in Parliament, will result, directly or indirectly, in a heavy drain on the income of workers in France and more generally on household income.
  2. This can be calculated on account of the competition effects induced not only by the “single market” but also by the Euro. In order to stabilize the economic situation in France, it will be necessary to reduce income (and wages) from 20% to 25% MINIMUM. This is not what Emmanuel Macron said, but one can deduce from his European (and Europeanist) commitments. It is here that the coherence of economic policy is at play: if one does not want to touch the single currency THEN a fall in wages and income from pensions is imperative because of competition between EU countries.
  3. This cut will have a strong depressive effect on the French economy, and will cause a further rise in unemployment. On the other hand, the rate of profit of firms (margin rate) will increase, but will have no effect on a subsequent recovery, because it is not in relation to the past profit rates that company strategies are determined but in relation to future sales volumes. Had another policy been adopted, and, to be sure, there are not thirty-six [4], there is only the exit of the Euro, then, for a modest rise in inflation, we could have recovered most of the German trade surplus (about 200 billion euros a year) and all the countries in the “South” of Europe that would have followed us, and restore not only the balances between EU countries but also equilibrium in France, as this would have resulted in an increase in employment, which would have led to increases in the coffers of social security schemes and tax revenues too. It should be recalled that tax exemptions (which are partly necessary to compensate for the existence of the Euro) cost the state budget 83 billion euros a year, or more than 4% of GDP; more than the total budget deficit!

Why the exit from the Euro is now central

This is why the dismantling of the Euro and, if necessary, the unilateral exit of France, is not, as is sometimes understood, a “whim” of economists or an ideological position dictated by some sort of nationalism, but the necessary condition for stopping the murderous policies carried out by François Fillon the day before yesterday, by Francois Hollande (and his economic advisor Emmanuel Macron) yesterday, and which will be conducted tomorrow by the same Emmanuel Macron, if he obtains an absolute majority in the Parliament.

To talk to a “revival” in growth while staying in the Euro and without touching the principles  of the “single market” can only be a false pretence that will inevitably lead, if one follows the logic to its conclusion, to an explosion in public debt. The exit from the Euro and the questioning of the ‘single market’ are not “soul foods ” for policies in search of a voice, but the absolutely indispensable levers for the establishment of different economic coherence, another policy, and for the defence of our social model. It will be necessary to choose: keep the Euro and expect an extraordinary social regression that will affect more than three quarters of the French (and probably close to 90%), or choose to renovate and defend our social model but by getting rid of the Euro. What it is impossible to do is to claim to defend the French social model, as it was constructed since 1945, through struggles but also compromise, and to retain the Euro.

[1] http://www.leparisien.fr/politique/exclusif-le-plan-de-macron-pourreformer-le-travail-04-06-2017-7017384.php#xtor=AD-1481423553  and http: // www. Lemonde.fr/politique/article/2017/06/07/reforme-du-code-du-labour-pasd-agenda-cache-assure-the-minister-of-working_5139834_823448.html

[2] http: // www. Capital.fr/economie-politique/assurance-chomage-version-macron-un-chambardement-qui-ne-fer-pas-que-des-heureux-1223893

[3] Here I quote Eurostat figures in gross wages.

[4] Macron’s Presidential programme is organized into specific proposals in 36 different areas.

Source: http://russeurope.hypotheses.org/6076

Translation by Revolting Europe

About revoltingeurope

Writer on Europe's Left, trade union and social movements @tomgilltweets or @revoltingeurope


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