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Seven years ago this month the federal funds rate—a key short-term interest rate set by the Federal Reserve—was lowered below 0.25%. It has remained there ever since.Lowering the fed funds rate to rock-bottom levels did not come as a surprise. The sub-prime mortgage crisis led to a severe economic contraction, the Great Recession, and Federal Reserve policy makers used low interest rates—among other tools—in an effort to revive the economy.
In times of economic crisis, politicians and analysts alike are typically quick to call for structural reforms to stimulate economic growth. Job security regulations are often identified as a policy area in need of such reforms. These regulations restrict the managerial capacity to dismiss employees to allow for downsizing or to replace workers and use new forms of employment such as fixed-term contracts when hiring new workers. Mainstream economics typically blames such regulations for the sclerosis of European labour markets, in particular in southern Europe. But so far, European countries have mostly failed to reform dismissal protection – despite the economic crisis and pressure from international organizations. Why are these regulations so difficult to reform (i.e. dismantle)?
The easy answer is, of course, that some powerful groups, in particular trade unions, oppose these reforms. However, opposition to reform is costly, and unions have been under massive political pressure in recent years to assent to such structural reforms. Why are unions so adamantly opposed to structural reforms and in particular the reduction of dismissal protection in case of open-ended contracts? What is so special about these regulations?
Job security regulations are more important to trade unions than one might think at first sight. In fact, trade unions have at least three reasons to fight the reform of dismissal protection in case of open-ended contracts. The first reason is rather straightforward: unions need to represent their members’ interest in statutory dismissal protection. The two other reasons, however, are often overlooked: unions have an organizational interest in retaining dismissal protection because these regulations prevent employers hostile to trade unions from singling out union members in workforce reductions. Put differently, protection against arbitrary dismissal also involves the protection of the local union organization against anti-union employers. In addition, unions have an interest in protecting their involvement in the administration of dismissals because this involvement allows them to influence management decisions at the company level. In many countries, job security regulations give trade unions important co-decision rights in case of dismissals (e.g. Swedish regulations award unions the right to co-decide the selection of workers in case of dismissals for economic reasons). Put simply, job security regulations often make unions relevant actors in the workplace.
The Apprentice: you’re fired? by Adam Foster. CC BY-NC-ND 2.0 via flickr
Of course, these three reasons don’t have the same weight in all European countries. For instance, the fear of employers hostile to unions is probably more important in southern European countries characterized by conflictual industrial relations (in most of these countries, employers were not required to recognize local union representations before the 1970s), while the involvement in the administration of dismissals is particularly important in countries characterized by long traditions of cooperative industrial relations (e.g. Germany and Sweden). Everywhere though, unions have sufficient reason to fight any reform of dismissal protection.
Facing such union resistance, governments have typically resorted to the deregulation of temporary employment. Unions have been more accepting of such two-tier reforms because temporarily employed workers are underrepresented among the union rank-and-file and because in the case of temporary employment unions have no organizational interests to defend. The deregulation of temporary employment (while the protection awarded to workers on open-ended contracts has remained more or less constant) has become a prominent example of so-called dualization processes, which are characterized by a differential treatment of workers in standard employment relationships (‘insiders’) and workers in more precarious employment relationships (‘outsiders’). Arguably, in some countries like Italy, the share of workers benefitting from (overly?) strict dismissal protection is now lower than the share of workers benefitting from hardly any dismissal protection at all.
So where are we standing after about three decades of calls for structural reforms such as the deregulation of job security? The three aforementioned reasons for unions to oppose the reform of dismissal protection in case of open-ended contracts are still there. The average union member still benefits from these regulations, unions continue to be worried about employers taking advantage of collective dismissals to rid themselves of unionized workers, and the institutional involvement in the administration of dismissals continues to be an important source of union power – in particular in times of dwindling membership.
Today, however, unions have a fourth reason to oppose structural reforms. For three decades they have reluctantly assented to two-tier reforms only to be confronted with further calls for numerical flexibility. By now there are as many workers on precarious contracts as there are workers on regular open-ended contracts – in particular in the countries that are said to be in greatest need of structural reforms. Nevertheless, calls for reform focus almost exclusively on dismissal protection of workers on open-ended contracts rather than on measures to improve the lot of the disadvantaged young, women, or elderly on precarious contracts. You don’t have to be a radical Italian trade unionist to find this one-sidedness a little bit odd.
In early April 2014 Greece returned to the sovereign bond market raising 3 billion Euros, following a four-year hiatus. This marked a turning point in the global financial and economic crisis that began in 2008 with the collapse of the subprime mortgage market in the United States and the advanced-economy recessions that ensued. The Greek economy is certainly not healed, with unemployment still exceeding 25%, and a government debt burden still unnervingly high — it is expected to reach 175% of GDP this year. That the Greek government was able to issue bonds to international investors, likely didn’t provide any degree or sense of solace for the many Greeks still struggling to get by.
This story has been repeated across much of the advanced industrialized economies, from the United States to the United Kingdom, from Spain to Italy. We are told that most economies have turned the corner, even if there is some way to go before life feels normal again — hopefully before some other crisis takes hold. Now we can get back to focusing on crises of the longue durée. Will anything be done to reduce wage and wealth inequality? Will labor markets adjust to increasing automation and artificial intelligence? How will we adapt to climate change? Are we prepared for the peak of the baby boom retirement?
Some countries and some regions within countries will certainly fair better than others. There will be winners and losers. This is largely a reflection of the core-periphery model that characterizes the geography of capitalism and its developmental logic. The drivers of economic growth and development are not nation-states, but large regional agglomerations, which often span different countries, and the global production networks and global financial markets that connect them. But what does it mean to be a resilient country or region in an increasingly integrated and interdependent global economy?
The global financial crisis struck a blow to globalization, leading to some speculation that we could see the reemergence of a more fragmented world economy comparable to periods following other major crises (e.g. the Great Depression). For those critical of global capitalism, it was a chance for alternatives to emerge. Yet, if one looks at life in the major world cities or the boardrooms of multinational firms, the powerhouses of global capitalist integration, the remnants of crisis are hardly visible. Capitalism marches onward.
In the last few decades the barriers to cross-border capital flows and trade have been progressively removed, leading to growing opportunities for firms to outsource and offshore production. Moreover, the integration of capital markets has opened up financing possibilities that are global in scope. For multinational firms, and those in the service of multinational firms, history and geography are no longer constraints. Is the core anymore resilient than the peripheries, if they can’t ultimately claim and contain the drivers of growth? Are the winners this time around going to be the winners next time around?
At the height of the Eurozone crisis it was not uncommon to hear suggestions (and even outright demands) that periphery countries (e.g. Greece and Spain) leave the euro. Exit would facilitate recovery, resetting prices to competitive levels with trading partners. And it wouldn’t mean the end of the European project. But Greece nor any other periphery country has left the Eurozone. Even if they wanted to, would they have been allowed? Market expansion and integration is at the heart of capitalism. To be sure, a currency union is not a prerequisite to market expansion and integration.
The countries on the periphery didn’t leave, because they’ve become too integrated with the core. Economies do not start and stop at the political borders of the nation-state, even if the nation-state is still a crucial site of governance and regulation. There is certainly diversity among capitalist economies, reflecting history and geography. But increasing interdependence and integration mutes diversity. Yet, what increasing interdependence and integration means for capitalist diversity is less important than what it means for the losers of capitalist crises. As market expansion and integration is at the heart of capitalism, losers aren’t left to some alternative. They are re-integrated in the fold, even though they may be left on the periphery.
Adam D. Dixon is a senior lecturer in economic geography at the University of Bristol. His research focuses on comparative economic geography, the geography of finance, and the political economy of institutional investors. He is author of The New Geography of Capitalism: Firms, Finance, and Society, co-author with Gordon L. Clark and Ashby H.B. Monk of Sovereign Wealth Funds: Legitimacy, Governance and Global Power (2013, PUP), and co-editor with the same of Managing Financial Risks: From Global to Local (2009, OUP).
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Image credit: “Money coins currency metal old historically pay” by Weinstock. Public domain via pixabay.
When great powers decline it is often the case that financial troubles are a key component of the slide. The vertiginous decline of a state’s financial system under extreme pressure, year after year, not only saps the strength and volume of financial activity, it also proves extremely difficult to reverse, and the great risk is that a disastrous situation is worsened by misguided and ultimately catastrophic attempts on the part of a government to dig itself out of its hole. So great does the eventual debt become that there is little hope of repaying even a majority of the capital, even with decades of peace and low spending ahead. The protracted financial and economic crisis that began in the West in 2007 provides an appropriate contemporary backdrop for a fresh examination of the decline of France’s financial system in the early eighteenth century under just such a mountain of poorly-backed debt. In the final decades of the seventeenth century France had been the leading great power in the European states system, indeed the only superpower capable of projecting significant force on multiple war fronts. Yet within a quarter of a century it had lost this comparative international advantage, as its financial strength degenerated alongside its military power.
France got into such a terrible mess in the final two decades of Louis XIV’s reign. While war was the essential cause of heightened state spending, as the largest economy in Europe France should have been able to sustain a protracted and extensive conflict, but it could not. The underlying problem was the combination of two classic, fatal ingredients: a weak fiscal base, and a precarious and expensive credit system. The tax base was chronically enfeebled by vast numbers of exemptions and privileges that the government only began to tackle in 1695. But tentative attempts to make the elites — the top 2-3% — contribute more to the costs of the state would, over the following 90 years, prove politically contentious and divisive, sapping the legitimacy of the monarchy. As for the weakness of credit, this arose not just from the problem of weak fiscal backing and the fact much of it was supplied by those entrepreneurs charged with tax collection. It also stemmed from the inherent unreliability of a government dominated by an absolute monarch, which at times was willing to threaten dealers in the foreign exchange and public debt markets with prison and professional proscription for pricing financial instruments on a realistic but unfavourable basis. Compounding these issues were huge concerns over the undependable and sclerotic legal framework for lending money at interest. France was, in short, overregulated, but capriciously so.
In the War of the Spanish Succession (1701-14) this system unravelled spectacularly. As tax yields declined the government pursued dangerous expedients, including the manipulation of the value of the coinage and the issuing of vast quantities of Mint bills: a hybrid of paper money and short-term credit notes. Furthermore, rather than relying overwhelmingly on well-organised advances on tax proceeds from leading tax collectors, the government turned the paymasters of the armed forces into state creditors on a giant scale. Louis XIV’s government became so dependent on these men and other entrepreneurs supplying the army and navy that they were able to make exorbitant demands. Some of them even penetrated the corridors of power as junior ministers, in an early form of military-industrial complex. All this came at a very high price indeed. The financiers and suppliers were rapacious, though they also needed to protect their own solvency and operations by ramping up costs as a form of insurance against arbitrary state management and the increasing number of revenue sources that were failing. These revenue failures played havoc with the system of appropriating revenue sources to expenditure, which was already being disastrously mismanaged by senior officials, and this earmarking chaos in turn threw the state even further into debt in a desperate attempt to keep the failing war effort going. This war effort was pursued much of the time beyond France’s borders, putting yet further strain on the state: Louis XIV needed vast amounts of foreign exchange to pay and supply his armies and allies in Spain, Italy, Bavaria, the Low Countries, and even Hungary. The volume of foreign currency required would naturally have pushed up its price, but the turbulent and deteriorating monetary and fiscal backdrop led international bankers to build astronomical costs into their exchange contracts for moving state money abroad. The failure to control their transactions, the separation of risky payment sources from their additional instruments of guarantee, and the short-selling of this paper precipitated a monumental crash of the exchange clearing system in early 1709 in Lyon, from which the city never really recovered.
By the time of Louis XIV’s death in 1715 French state debt had risen more than three-fold from the size it had been thirty years earlier, and much of that increase was down to a few short years between 1702 and 1708 — the early modern period may in many ways have seen a much slower pace of life than we experience, but financial crises could unfold roughly at a similar pace. The real danger is that it can take as long or far longer to effect a stabilisation and recovery, thus tempting governments into dangerous policy decisions to try to generate swift recoveries. In the years after 1715 the Regency government for the boy king Louis XV took exactly this course, seeking to liquidate much of the state debt by swallowing the snake-oil solution peddled by John Law of hitching debt to a national bank backed by vast speculation on the highly uncertain economic future of overseas trade and colonisation. The subsequent liquidation of Law’s System forced the government into inflicting enormous haircuts on creditors, further eroding confidence in the monarchy, while future generations were still saddled with levels of debt that the state machinery was not designed to cope with. It also condemned the French body politic to a series of destabilising political struggles over state finance that culminated in final breakdown and revolution.
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Subscribe to only history articles on the OUPblog via email or RSS. Image credit: Louis XIV and His Family circa 1710. Wallace Collection. Public domain via Wikimedia Commons.
