PAUL JAY: Welcome to The Real News Network. I'm Paul Jay in Washington. The European leaders
have met, and they have come up with an agreement, but it's rather dubious, most people think,
whether they've actually solved anything. Now joining us to talk further about the roots
of the crisis in Europe and what solutions might be possible is Heiner Flassbeck. Mr.
Flassbeck serves since 2006 as director of the Division on Globalization and Development
Strategies of the United Nations Conference on Trade and Development, and he was the vice
minister from October 1998 to April 1999 at the Federal Ministry of Finance in Bonn, responsible
for international affairs, the European Union, and IMF. Heiner's joining us from Geneva.
Thanks for joining us. In a recent talk you gave at the University of Texas, you were
saying when you were talking about the euro crisis that it's not fundamentally a struggle
or a fight between countries, it's not fundamentally a struggle between North and South, that it's
really a struggle between capital and labor. And people don't talk about that very much
and use that kind of language anymore. What did you mean by that?
HEINER FLASSBECK: Well, what I meant is the redistribution of income that we have seen
in the last 20 years and that was over--papered over only for a time, for a short time, by
some strange hopes of getting wealthy through nothing, by speculating in some markets and
the stock market and so on. But now it comes to the real question: are we willing to have
everyone in the economy participating in the success of the economy, which is expressed
in productivity increases mostly, or not? And I think if we do not answer the question
affirmatively, we will see that the kind of market economy that we have now will reach
a limit, will hit a wall, because look at the United States, look at Europe, look at
Japan. If you do not give people reasonable expectations for income growth, you will not
grow at all. As I said, it can be papered over for a time by some illusionary effects,
but in the end you have to pay them reasonable wages, you have to pay them decent wages.
And if you don't do that, the whole economic model will stall and will not be able to solve
our problems.
JAY: So define what you mean by reasonable wages. I mean, you've talked before about
that wages should be linked to productivity. What's the evidence that they're not linked--so
linked?
FLASSBECK: Well, what we have is a fall in wage share, which means that real wages are
not following productivity anymore. The two successful decades after the Second World
War that we had were in particular decades where real wages were strictly following,
even overshooting productivity sometime. So this was a sound, sustainable model. What
we have seen afterwards is--was first due to the shock of unemployment, then to the
changing powers between labor and capital. We saw a permanent decrease of wage shares
in many, many countries. And this, as I said, has come to a limit now. We may go on--as
you see in Japan, we may go on with falling or stagnating wages all the time, but then
the overall economy will stagnate. You will end up in deflation and stagnation. This is
the model we are heading for. And now is still the time to change it, to turn it around.
But at the moment I do not see the political leaders who could do it and I do not see my
colleague economists, so to say, question the model of wage flexibility, question the
model of more flexibility in the whole of the labor market. That was clearly the mainstream
of the last 20 years. We should remember that in particular American colleagues were all
the time, all the time asking Europeans to become more flexible. Then Germany became
more flexible, but with disastrous results not only for the eurozone but for Europe as
a whole.
JAY: One of the arguments you hear from corporate leaders, finance leaders privately--they don't
say this publicly very often, but they say that for Europe and North America to compete
with China and India and Brazil, they actually have to lower wages in Europe and North America,
that that's actually the object of all of this, and that these--we just have to go through
this catharsis to become competitive. What do you make of that argument?
FLASSBECK: This is in my view wrong from two sides. If you look at Japan, Europe, and the
United States together, then the share of consumption and GDP is something like 80 percent
or more than 80 percent. So forget about exports and forget about investment; if you do not
revive consumption in these three big regions, then you will end up nowhere. And it would
be a joke, it would be just a wrong way round if these big three regions which make up for
something like 65, 70 percent of global GDP would try to reach China from the top, so
to say, instead of letting China come from the bottom. And if--and on the other hand,
it's wrong because if you look at China, China is successful because wages are rising. Wages
are rising now for ten years. Real wages are rising by something like 7, 8, 9 percent in
China. And that makes China successful, not only the export and the competition through
exports.
JAY: So what would be the consequences on China if you have this kind of decade of recession
in Europe and North America?
FLASSBECK: If you look at China, China has changed its strategy, China is changing the
strategy. Right now they have understood that wages have to rise. They give strong signals
through minimum wages, for example, to the companies. They have supported strong wage
increases in many firms. And I think this is a clear signal that they know that they
need the participation of the mass of the people and they cannot keep them out and they
cannot allow too much inequality inside the country to make it politically--to keep it
politically stable.
JAY: You said earlier in our interviews that this lost decade is virtually inevitable unless
there's radical measures taken. What kind of measures would you like to see?
FLASSBECK: Well, I think to overcome such stagnation and deflation, you need very strong
fiscal stimulus, on the one hand. But Japan has shown--Japan has tried several times to
overcome it by fiscal stimulus. It's very difficult politically, and we know the blockades
in Europe and in United States concerning fiscal--more fiscal stimulus. So you need--in
addition you need policies that directly address the wage problem. Japan has never done that.
Japan has tried monetary policy for ten years, then fiscal policy for ten years, but they
never tried to tackle the wage problem at the root, so to say, by talking to employers
and by strengthening unions so that you get a consensus. And we have forged consensuses
of that kind, many in the past after the Second World War, to forge a consensus that leads
everybody to understand that without wages rising in line with productivity, real wages
rising in line with productivity, plus a premium for nominal wages to keep inflation in check,
it will never work. You will lose the model, the successful model of market economy that
we're used to.
JAY: The global finance sector, which has so much power not just in the economy but
in the politics of just about every country on earth, is not going to be very interested
in the kind of policy that you're suggesting. So, assuming they don't get some kind of brain
transplant or a heart transplant, what are we likely to see over the next period?
FLASSBECK: Yeah, that's a very good question, because what I'm talking about is really the
real economy is not so much the finance sector, but we have to cut it down anyway. We have
to understand that what has been happening in the finance sector was a pathological development
in the last 20 years, that they have not created social wealth, that they have not contributed
to productivity, but they have appropriated a very high share, much higher in U.S. than
in Europe, of our overall income that everybody has been contributing to. So this has to change
anyway, and I think we are discussing it a bit. You have your vDodd-Frank Act. In Europe
we're coming now up with something like financial regulation. But this has to be strengthened.
It is another part, so to say, of the same story that you have to weaken the financial
sector and strengthen the real sector of the economy. But the real sector cannot be strengthened
without a reasonable wage regime.
JAY: Well, even Dodd-Frank, which was pretty weak to begin with after so much pressure
brought on Congress by Wall Street, what it did have, for example, what the regulations
that were supposed to be enacted by the Commodity Futures Trading Commission, as an example,
on position limits, the rules they come up with are so weak after so much further lobbying
by Wall Street that they're unlikely to be very effective. So this ability to actually
regulate this sector seems negligible. And if that doesn't change, then what?
FLASSBECK: Yeah, but there is no climate now as was at the beginning of the century. There
was a climate, a general climate of euphoria about finance that is no longer there. On
the other hand, as I said, you had some illusionary effects on the side of households that were
consuming by reducing the savings rate. That is over now. People have understood that this
is not a feasible model. So the overall global climate is not there for new bubbles to be
inflated. So the financial sector is not as strong as it was some years ago. But, nevertheless,
it's very clear we need political leaders who are able to fight and withstand the lobby,
the very strong lobbying of the sector. But if we don't do that, then you I would forecast
it getting worse than just stagnation and deflation. Then we will end up, maybe, in
a full-fledged recession. And only we'll find then, hopefully, as was after the Great Depression,
the political strength to push back the financial sector.
JAY: Thanks very much for joining us.
FLASSBECK: You're welcome.
JAY: And thank you for joining us on The Real News Network. And don't forget the donate
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