28/11/2007
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Overview
Two central economic policy concerns that TUAC raised
in consultations with the OECD Ministerial Council in May 2007 were
the need to reverse the declining wage share and increase in
earnings inequality throughout the OECD area and to
rebalance growth among OECD regions at high levels of employment
and reduce risks of a disorderly correction of trade imbalances.
These remain central concerns. The declining wage share as well as
rising earnings inequality has been confirmed in the OECD
Employment Outlook and in the IMF’s World Economic Outlook. The
unsustainable imbalances in global trade, in consumption and in
savings constitute a threat to economic stability. However the TUAC
statement in May was made against then relatively benign overall
growth prospects for the world economy.
Those prospects look increasingly uncertain following
the financial crisis of the summer that is still unfolding. Through
the third quarter of 2007, economic growth has been strong in the
U.S. and much improved in Europe and Japan. Demand from China and
other emerging markets has powered rapid growth globally. However,
the sub-prime crisis in the U.S. has triggered severe tightening of
global credit markets and turbulence in global equity markets which
are now threatening a serious deceleration of growth in the real
economy in the U.S. and beyond. At the same time the rise in energy
demand has also led to oil prices approaching 100$ per barrel – a
quadrupling of price since 2004. Even if the oil intensity of
output has been reduced since the 1980s, this will depress demand
while raising headline inflation. Given their current account
positions, consumer debt levels and overblown housing markets, the
Anglo-Saxon economies and some others appear to be particularly at
risk of a recession or even stagflation.
TUAC is therefore particularly concerned at the
downside risks to the current outlook and we are calling for a
coordinated government policy response. In the
near-term, because of the global implications of slowing growth in
the U.S., OECD member governments must coordinate monetary and
fiscal polices to assure that the, now perhaps unavoidable,
re-balancing of exchange rates which up to now has involved almost
exclusively the euro-dollar relationship, takes place in the
context of robust growth to prevent unnecessary unemployment and
continued stagnation of wages.
The United
States
The
Federal Reserve, along with other central banks, has responded
aggressively to tightening credit markets by opening the discount
window and lowering short-term interest rates. In
doing so, however, the Fed has precipitated a sharp and perhaps
uncontrolled decline in the dollar’s exchange
rate. The Fed now faces a serious
dilemma. Sharply falling U.S. housing prices and
stagnant wages threaten the debt-financed consumer spending that
has powered the current U.S. recovery. And a
falling dollar, together with rising energy prices, threatens an
acceleration of domestic prices. The Fed may be
faced with a painful near-term prospect of stagflation.
How the Fed negotiates this complex
situation carries enormous implications for the future of growth in
the U.S. but also in Europe, Japan and globally as
well. Falling housing prices threaten a much broader
decline of consumer spending than the decline of equity prices in
2000, a decline only partially offset by an improvement in the U.S.
external account by virtue of a declining dollar. A deceleration of
growth in the U.S. will be a drag on global growth as
well. A falling dollar will aggravate the
problem for Europe, Japan and other countries whose currencies are
appreciating. And, if the dollar’s decline is
uncontrolled and continues to decline rapidly, it threatens to
undermine global financial and economic
stability.
The
Euro-zone
The European Labour Network for Economic Policy (http://www.elnep.org/) which is
linked to the ETUI, the Research Institute of the ETUC - issued in
October their updated forecast for the Euro zone. The forecast also
reflects a rather benign situation with more robust growth in 2007
of 2.5 % than forecast in the spring. Looking forward, however the
update notes the less sound forecast for 2008 and the likely impact
of the continuing financial turmoil. Even over the past month since
the cut-off date for the forecast the assumptions look increasing
optimistic with regard to exchange rates and energy
prices.
In Europe the financial crisis has changed the terms
of the debate on monetary policy. Where as prior to the summer the
European Central Bank had been set on increasing interest rates to
slow European growth, interest rates are now being kept on hold and
the ECB has been injecting massive liquidity into money markets to
maintain liquidity. However European trade unions are of the view
that this is not enough. Past monetary tightening is already in the
system and coupled with the Euro’s rise and the financial shock, as
well as the decline in purchasing power due to higher energy and
food prices presents a picture of greater downside risks than the
ECB is estimating. The ETUC has therefore called for immediate cuts
in interest rates in the Euro area.
Japan
In Japan, the concerns that TUAC raised in May remain.
Although growth over the past two years has recovered from the
long-lasting recession, stagnant real wages and declining
disposable income due to increases in tax and social security
contributions by working households remain serious problems. The
challenge is to ensure that growth is more equitably shared and
sustainable by encouraging rising wages and incomes and domestic
demand. The current nominal wages increases fall short of increases
necessary to stimulate stronger household spending and domestic
growth. They must be backed up by fiscal policy in support of
household consumption. The Bank of Japan should for the time being
shy away from further increases in interest rates that could choke
off potential recovery.
Regulation
of financial markets
OECD governments
must also now address the lack of adequate regulation of global
capital markets. The phenomenal growth derivative markets has been
regarded by the OECD and most financial observers as a positive
development in spreading and mitigating risk. The transformation of
the US mortgage crisis in February into a global financial turmoil
during the summer 2007 has shown the dangers. The growth of
derivative products, such as collateralised debt obligations, has
resulted in the US residential mortgage debt default being passed
on to global credit markets and have served as an accelerant to the
crisis. Contagion has been fuelled by the opacity of derivatives’
asset price fixing and underlying risks, the highly leveraged
investment strategies of hedge funds, the widespread use by banks
of off-balance sheet and un-regulated ‘special investment
vehicles’, and the absence of adequate public regulation and
supervision. Short term monetary action,
necessary as it is, leaves unaddressed the existence of large gaps
in the regulatory coverage of global financial markets. The TUAC
President wrote to the OECD Secretary General in August pointing
out that the OECD was uniquely positioned to help address the many
important issues posed by these new financial players and inform
the discussions now underway among a number of national
governments. At the May Ministerial, the TUAC called
for a horizontal consultation addressing these complex and timely
issues. Such a consultation, drawing on
expertise from throughout the OECD, from the advisory bodies and
from outside experts is more necessary than
ever.
