Macroeconomic dialogue

Brussels, 09/11/2009

At the recent Tripartite Social Summit, I quoted the ancient Roman playwright, Platus. I make no apology for repeating his apt remark to our present circumstances. Platus said “I am a rich man as long as I do not repay my creditors”. Or as many bankers might express it, “we are rich men as long as we get almost free money and guarantees from Governments, and give priority to repairing our own balance sheets.”

I read yesterday that Mr Blankfein, boss of Goldman Sachs, which was effectively bailed out by the US Government, claiming to be doing “God’s work” as he distributes a bonus pool of 20 billion dollars. He claims “everybody should be happy” and welcomes the return of titanic pay days at Goldman Sachs. Is everybody here happy with that?

What about the rising levels of unemployed? What about this year’s school and college leavers, unlike Goldman Sachs, innocent of causing the recession but who face a depressing future as they search for work? What about SMEs that can only get expensive credit?

These guys in Wall Street and London and elsewhere are perfectly capable of repeating the excesses which led to the current crisis. How do we stop business, and bonuses, as usual?

Not easy, I accept, without socialising the whole system. But this is a major element of social and economic instability. It is Bourbon like behaviour. In fact, they make the last French Kings look rather modest in comparison.

There is another major area of instability. There is already wide pressure to pronounce the end of the crisis and cut public spending. That EU Governments act prematurely and choke off the recovery is the ETUC’s biggest worry at the present time.

(A premature move by the US Congress to balance the books in 1937 killed the recovery then and the recession did not end until World War Two.) Despite general calmness in Pittsburgh and over the weekend in St Andrews about the stimuli packages, some EU Governments are clearly planning savage cuts in public expenditure. Ireland has already started.

Yet if we have a normal recovery, the debt will diminish remarkably quickly; “and if we don’t, it won’t and won’t need to” (Samuel Brittan FT Oct2). “Don’t exit, don’t panic” is the ETUC message to the Council and the Commission. There is realism around. But there is panic around too, not helped by today’s report from the European Commission warning on debt levels.

This is not just a question for national governments. It is a European issue because of the clear dangers that a country which exits too early seeks to transfer its problems to its neighbours. By cutting public spending in the absence of a revival of the private sector, it places its hopes on exports to other countries which are maintaining high spending levels. Labour market policies have been successful in keeping people in work. We need more to help the young and the unemployed generally get work.

The fact is that we remain in the eye of the storm. Demand supporting the present modest, fragile recovery is based largely on temporary factors – renewing inventories, car scrapping, short time working schemes etc – while becoming more evident are wage cuts, public expenditure cuts, tax rises, and repayment of debt at every level. To use the term ‘recovery’ could be misleading. We are arresting the decline but are still on the edge of a precipice.

We are very aware of downward pressure on pay. What might make sense in the context of an individual firm does not make sense if it leads to competitive wage cutting and to deflation and a reduction in spending power. Are we not trying to get spending up? We should be.
And behind the debate on exit strategies is the debate “who pays”. The broadest shoulders must carry the heaviest burdens.

If the bankers are Bourbons, I have no ambition to play Robespierre. But remember if you let bank executive pay rip while the rest experience cuts, you venture into dangerous waters.

This is not an economics seminar. These are dangerous times and we want a continuation of public deficits and investment to support a greening of the economy, efforts to keep up spending power, a rejection of the Irish route, and a rejection too of over simplistic notions of more flexibility in labour markets, with more precarious contracts, lower levels of pay and benefits and all the rest.

If the bankers are Bourbons, I have no ambition to play Robespierre. But remember if you let bank executive pay rip while the rest experience cuts, you venture into dangerous waters.