Schuldenbremse [debt brake] by Constitutional Law? No, Thanks

In 2009 the German Constitution was amended to introduce a balanced budget provision, or Schuldenbremse [debt brake]. Starting in 2016 the German federal government will be constrained to a deficit ceiling of 0.35% of GDP; from 2020 the Länder will not be permitted to run any deficit at all. An exception can be made for emergencies such as a natural disaster or economic crisis. All USA states except Vermont have a similar constitutional provision (Oregon is constitutionally bound to return to taxpayers any surplus in excess of 2%), though of course this does not stop them from incurring large debts. In any case States or Länder balanced budget commitments do not interfere with either a Federal macroeconomic stimulus or inter-state fiscal transfers, so that the restraint does not really matter all that much. There is a balanced budget provision is in the Swiss Constitution. Such a provision has been variously recommended also for the US Federal government but never achieved the support of two/thirds majority of states in both houses for it to be introduced.

Last year President Sarkozy proposed a return to balanced budget in France. On the eve of the Eurogroup meeting of 14 February 2011 the German Finance Minister, Wolfgang Schauble, leader of European Democratic Conservatives, proposed the introduction of a German-style constitutional ceiling in other EU countries. In the coming weeks the French Premier François Fillon is expected to present a Constitutional amendment committing France to a specified time-path of progressive reduction of the deficit from €150bn (2010) down to zero, to be approved by Parliament before the summer and to be monitored by the Constitutional Council.

Let us leave aside questions of the political feasibility of introducing such an amendment into a country’s constitution, and of the credibility of a government commitment to implement it. It is clear that current levels of sovereign debt are excessive and insustainable in most EU member states, and that deficits will have to be cut in order to stabilize and reduce them. The real question is about the effectiveness of government policies aimed at expenditure-cutting and tax raising. Such policies would reduce the deficit coeteris paribus , but at the same time are bound to reduce demand and therefore GDP and tax revenue to an even greater extent: their final outcome is indetermined.

Victoria Chick and Ann Pettifor (FT, 4 October 2010), using UK data from 1918 to 2009, show that a persistent expenditure cut is correlated with a rise in the debt/gross domestic product ratio; and expansions in expenditure with a fall in debt/GDP. They explain that “This result arises because government is not in a position to determine its own deficit/surplus. The size of the budgetary outcome depends on the plans of the entire economic system and its reactions to the government’s planned actions.”

“Since the deficit is not something that government can control, setting out to reduce the deficit is to look at the problem through the wrong end of a telescope: the way to reduce a deficit in a time of unemployment and feeble recovery is to spend (preferably wisely) to promote employment and permanent improvements to our infrastructure, including our “human capital””.

“Keynes looked through the telescope the right way round: “Look after the unemployment, and the budget will look after itself.” "(Chick and Pettifor, 2010).

What is worse, a simultaneous collective round of expenditure cuts and taxation increases is obviously going to have a greater impact on each country than its adoption by a single country – which is why the recessionary impact of deficit reduction is frequently under-estimated and neglected.

In any case, while a balanced budget might be a reasonable stance (possibly and conditionally) in an effort to stabilize public debt, surely this cannot be in a single year: not unnaturally, in 2003, approximately 90% of the members of the American Economic Association agreed with the statement, "If the federal budget is to be balanced, it should be done over the course of the business cycle, rather than yearly."

The case for a balanced budget is often construed as a way to prevent a burden on future generations: thus fiscal stimulus is regarded as “little more than an exercise in the redistribution of wealth from our grandchildren to today’s special interest groups” (Darrell Issa, "Obama's Keynesian failures must never be repeated“ , FT Comment, 8 February 2011)

John Eatwell commented that “If government borrowing were indeed a burden, then real per capita income of future citizens would be reduced.”

“But where there is borrowing there is lending, so that payments of interest and repayments of capital that may result from stimulus packages are from taxpayers to lenders – no loss of real income there, just a transfer payment.”

“The assertion must therefore rest either on the argument that government spending “crowds out” private investment, not very credible with the current output gap and interest rate policy, or that there is a behavioural link from current borrowing to present and/or future levels of investment and growth.”

“It is possible to build models and select empirical evidence that go either way. What is not possible is to make the unambiguous assertion of future “burden”.” (Burden on our grandchildren’ is ambiguous talk, FT Letters, 10 February).

The “crowding out” idea is indeed what lies behind advocacy of balanced budgets : public expenditure multipliers are deemed to be small, less than one, “close to zero” according to Barro. Individuals are believed to follow the principle of Ricardian equivalence: when government reduces expenditure today they expect lower taxes in the future and therefore they rush at once to work, earn and spend more . Thus fiscal consolidation is deemed to be expansionary, see the latest “Public finances in the EMU” report, or Rother, Schuknecht and Stark, “The benefits of fiscal consolidation in uncharted waters”, ECB, (2010).

However, recent empirical work (such as Christiano, Eichenbaum and Rebelo, “When is the government spending multiplier large?”, 2009 or Corsetti, Meier and Mueller, “What determines government spending multiplier?”, 2010) has shown that public expenditure multipliers “are likely to be much larger, between one and two, when monetary policy is at the zero lower bound, when exchange rates are fixed and when a large number of households are credit-constrained. This is more or less the case in the current situation: a number of countries are experiencing de-leveraging by households, the central bank’s interest rate are low, preventing an accommodation by the central bank of a budgetary contraction, and the Eurozone countries have, by definition, fixed exchange rates.” (Raphael Cottin, Public finances in 2011: happy austerity, Eurointelligence.com, 28.01.2011).

Cottin notes that the European Commission services implicitly recognize this: the latest “Public finances in the EMU” report mentions (Part III, section 6) that fiscal expansions are likely to be expansionary under the current conditions: “but the symmetrical argument, that fiscal consolidations are likely to be contractionary, is carefully avoided.”

The Italian writer Vittorio Alfieri (1749-1803) is famous, among other things, for having himself knotted tightly to his chair with rope, in order to discipline himself to hard work and uninterrupted study. This is traditionally taken as evidence of his strong will, as claimed in his celebrated statement "Volli, sempre volli, fortissimamente volli". Surely if Alfieri really had such a strong will he would not have needed to be tied so tightly to his chair. Sarkozy and Schauble may tie themselves and their own budget in knots but leave other member states alone to pursue a more rational and enlightened fiscal policy.

A single European sovereign bond? Pie in the sky, unless…

Delors’ Union Bonds

Nearly 20 years ago, in 1993, Jacques Delors proposed the issue of “Union bonds", whose repayment would be guaranteed by the Community budget, in addition to EIB (European Investment Bank) loans to finance infrastructure investments in transport, energy and telecommunications (EC White Paper on Growth, competitiveness, and employment. The challenges and ways forward into the 21st century, (COM (93) 700 final). This was a pale reflection of a much more ambitious and radical plan suggested to Delors by one of his economic advisers, Stuart Holland, who envisaged the issue of Union bonds by a European Investment Fund as a vehicle for the transfer of a substantial share of Member States’ national debt to the Union. After such “tranche transfer” member states would continue to service their share of their debt, but at a lower interest rate (Stuart Holland, The European Imperative: Economic and Social Cohesion in the 1990s. Foreword by Jacques Delors, Nottingham: Spokesman Press, 1993). Stuart expected the bonds not to count as debt of the member states, by analogy with US Treasury bonds, but because member states would continue to service them that analogy does not hold. Neither did he contemplate any need for a Union guarantee: the EU having virtually no debt, Union bonds would be credible regardless. Union bonds remained a dead letter.

Eurobond redux

The recent euro crisis, correctly seen as a crisis of sovereign debt, resurrected the idea of a single Eurobond whose issue would gradually replace at least part of the member states’ sovereign debt. In 2009-2010 several proposals in this sense were voiced again, among others by Paul de Grauwe and Wim Moesen (Gains for All: A Proposal for a Common Euro Bond, in: Intereconomics, Vol. 44, No. 3, 2009, pp.132-135), Daniel Gros and Stefano Micossi (A bond-issuing EU stability fund could rescue Europe, 2009, Europe’s World, spring); Jacques Delpla and Jakob von Weizsäcker, The Blue Bond Proposal, Bruegel Policy Brief 2010/3, May); Erik Jones, (A Eurobond proposal to promote stability and liquidity while preventing moral hazard, ISPI Policy Brief, n.180, March 2010); and, of course, Stuard Holland again (Europe needs a Gestalt shift, 2010 and elsewhere).

One such scheme was authoritatively backed by Luxembourg Premier and Treasury Minister Jean-Claude Junker and the Italian Finance Minister Giulio Tremonti in the Financial Times of 5 December 2010 (E-bonds would end the crisis). Giuliano Amato also forcefully endorsed it (in IlSole-24Ore of 11 December 2010). But German Chancellor Merkel and French President Sarkozy rejected the idea, together with the alternative proposal of raising the size of the EFSF (European Financial Stabilisation Facility) set up in May 2010 to deal with Euro-zone sovereign default .

Lower interest rate

The scheme for a single Eurobond comes in different sizes and forms, but all proposals have an underlying consideration in common: a European bond would attract a lower interest rate than the average (weighted) interest rate at which nation states could borrow in international markets, because of the lower liquidity premium and the lower credit risk premium. The funds raised through issues of a single Eurobond could be channeled to Eurozone member states in various ways: by buying their new national bond issues, or by buying back old national bonds, or by lending to member states against the security of domestic bonds. If a tranche of member states’ debt could be “transferred” to the EU in this way, say something of the order of 60% of European GDP, in line with EU own-policy stated in the Maastricht Treaty and the Growth and Stability Pact, a Eurobond should not worry global financial markets. A stock of all-European bonds would give the Euro a wider appeal and promote its diffusion as a reserve currency. Eurozone debt as a percentage of GDP was 84% in 2010 (79% in 2009), 60% of it would be €5.5 trillion, large enough to compete with the US Treasury bonds and reap any conceivable benefits in terms of liquidity.

Responsibility for servicing these bonds could be envisaged as: several; several and collective; European.

Several responsibility

Every participating member state would be responsible for servicing these bonds in a pre-fixed proportion, say proportionally to the shares it holds in the European Central Bank (the kind of approach followed by De Grauwe and Moesen, 2009).

But an investor potentially interested in this type of bond could invest in it today, simply by purchasing a portfolio of bonds issued by all member states in the same proportions. Such composite instruments are not unusual: the Markit iTraxx SovX Western Europe Indez, for instance, is a basket of mostly Eurozone Credit Default Swaps. The yield on such composite bond would have to be exactly the same as that of a corresponding balanced portfolio. There would be no interest saving in issuing such a bond, for it would be a useless exercise. If the bond attracted a liquidity premium so should the composite portfolio, and financial intermediaries would profit from its introduction on an increasingly larger scale and, therefore, they would be bound to introduce it, without any official initiative or inducement.

Collective and several responsibility

Under this kind of scheme the bond could be covered by a "collective and several" guarantee, i.e. in case of default bond-holders could claim reimbursement from any participating member state of their choice (cf for instance, Jones 2010). A spokesman for President Sarkozy was reported as saying. "This proposal is not entirely new. It raises difficulties notably in terms of sharing costs and profits... " (Eurointelligence.com, 10 December 2010). Obviously the interest cost of borrowing through a single Eurobond, though lower than the average cost of borrowing individually by member states, would be higher than that applicable to “virtuous” states. However the lower interest rate due to the lower risk and enhanced liquidity could benefit all: all countries could be charged a rate lower than but proportional to their own market rate, all being better off, even leaving something left over for accumulating a reserve.

In the case of several and collective responsibility for the bonds, however, there would remain two distributive problems. A minor problem is how to cope with member states with a debt/GDP ratio lower than the tranche of national debt whose transfer to the EU is envisaged. Slovakia at 42% debt/GDP ratio in 2010, Slovenia at 34%, Luxembourg at 20%, or Estonia with with a paultry 8%, would have to be granted a scaled down maximum liability in case of default. A second, major, problem is that more “virtuous” countries like Germany would be more exposed than weaker members to the risk of having to bail-out defaulters; who could indulge moreover in “moral hazard” behaviour and deliberately take advantage of the cover from such collective responsibility (though moral hazard would be limited to the share of their debt covered by Eurobonds, since the rest of their debt would attract a higher marginal interest rate). Thus it is perfectly understandable that Germans and other “virtuous” member states would be irreducibly opposed to such a scheme (unless accompanied by the realization of objectives close to the hearts of the virtuous, e.g. fiscal conformity across EU member states). True, even as things are now these countries are exposed to the risk of having to bailout defaulters, so much so that interest rates on German 10-year bonds have also increased from under 2% to almost 3%. But as things are now their liability is not automatic, it can be accepted or refused according to German perceived interests (such as German banks exposure to default), and subjected to conditionality imposed on defaulters. Therefore such a solution of collective and several responsibility for the single Eurobond is almost certainly politically impossible.

A European guarantee

Under this type of scheme the bond would be covered by a European guarantee extended by a hypothetical European Debt Agency that would have the task of “managing” a debt that has now become European. But “managing” debt involves manipulating the term structure of debt (funding and un-funding) and cover of exchange rate risk of bonds issued in foreign currency and the like, not the burden of debt service and repayment. It is crucial to consider that the European Union budget represents just over 1% of European GDP and, what is devastatingly worse, has a ZERO primary surplus, because the EU lacks the power of taxation and its scant revenues (primarily a share of VAT and the shrinking revenue from external common tariffs) can be supplemented by national contributions proportional to GDP only to balance the books and no more. Thus neither the EU Budget nor special Agencies obtaining resources from it can “manage” European debt, including its service, on the scale envisaged by the proposals (of the order of magnitude of over €5 trillion). Therefore such Eurobonds would get a rating lower than, say, that of Italy, who with tax revenues of 43% of GDP has at least the theoretical possibility of running a primary surplus and serving its debt.

Under a European guarantee the bonds in question would be among the junkiest of junk bonds, with a credit rating and an interest spread not lower but higher than the Eurozone average.

Junk bonds, unless…

Unless the Agency in charge of debt service were to be endowed from the start with an amount of resources adequate to credibly guarantee its Eurobond issues. But:

The EFSF could not act in that capacity because it can count only on participant states' national guarantees, not ready cash. Thus bond issues have to be over-collateralised in order to secure AAA rating since they are guaranteed by less-than-AAA rated countries, reducing the EFSF operational capacity from the trumpeted €440bn to about 230-240bn. And such funds would partly dissolve with any downgrading of guarantor member states, and would vanish proportionally to their share in the case of their default. So much is this so that a proposal has been discussed in Brussels "in finance ministry circles" whereby non-triple A nations such as Italy, Spain and Belgium should contribute cash payments to the EFSF rather than guarantees (Eurointelligence.com, 21 January 2011). And recently Eurostat ruled that “Member states will have to account for EFSF’s debt issues as gross debt, proportionate to their share in the EFSF” (Eurointelligence.com 28 January 2011).

Nor could the ECB act in the capacity of guarantor, for several reasons. First, even modest ECB purchases of the sovereign debt of the weaker states during the recent crisis (on a scale of just over $82bn since last February) raised concerns about the quantitative growth and above all the quality of ECB assets, which required a more than doubling of ECB capital from €5bn to €10.8bn at the end of 2010. Secondly, the ECB has announced last week that even those purchases have come to an end. Thirdly, such operations are bound to infringe ECB independence and the pursuit of its inflation target of close to 2% but no more than 2%. Alberto Quadrio Curzio (Corriere della Sera, 12 December 2010) has suggested the issue of €1000bn bonds guaranteed by the surplus gold holdings of Eurozone Central Banks; Germany’s 3,406 tonnes, plus Italy’s 2,451 tonnes and France’s 2,435 tonnes, together hold reserves higher than those of the Fed at 8,133 tonnes. This may not be the best option, for it would impinge on Central Banks independence and meet general legal obstacles (as well as special obstacles in a country like Italy where the Central Bank has the curious feature of still having dominant private shareholders); but at least Alberto has faced the issue squarely and suggested a possible solution.

Certainly the EIB could issue Eurobonds on a large scale – although if and only if its capital were raised to an extent commensurate with the scale of its envisaged operations, in the form of monies actually disbursed up-front or guaranteed by AAA-rating states and not, as Stuart Holland so implausibly argues, because it can finance national investments with loans that are alleged not to count as national debt (they still need to be serviced by borrowing member states, why should they not count as part of their debt and where in the treaties does it say that they do not?). The same could be said of a correspondingly capitalized European Debt Agency or similar ad hoc institution. But any such capital increase would have to be raised by the weaker (low rating, high spread) individual states first.

Would global financial markets really be sufficiently benevolent, enlightened and optimistic as to see such an increase in national debt as a move towards the reduction of European sovereign risk? Suppose the indebted individual members of a family incurred new debt to provide a family-guarantee on some of their debt; would creditors really regard this as offering them additional protection, or as an increased risk of default deriving from moral hazard encouraging higher profligacy by those family members?

Without a considerable and effective tightening up of fiscal constraints, as demanded by Germany, it is unlikely that Euro-zone creative accounting via the creation of a Special Debt Agency – a kind of Special Investment Vehicle à la Enron – would restore global investors’ confidence in Euro sovereign debt. The single European bond seems to require fiscal Union as its pre-condition, rather than being a substitute for fiscal Union. Not in our lifetime (i.e., over our dead bodies) comes the Eurosceptic, nation-staters’ cry.

Think Small: the solution

Fiscal Union is not a yes or no option: it comes piecemeal too, responding to the minimum stake that different member states can afford or stomach. All that is required is that at least some of the national tax revenue of member states – corresponding to a uniform, at least initially small percentage of national GDP – is specifically earmarked to servicing the single Eurobonds issued by a European institution. This is how it could begin; its effects would be cumulative over time. Of course it would not generate additional resources to service sovereign debt but, starting from the other end of the salami, so to speak, it would be an effective way of enforcing the fiscal constraints that are a precondition of both a European response to European sovereign debt and an ever-deeper Union. If not now, when?

And if not, is there European life after member-state sovereign default?

Monsieur Trichet Is In Denial

On 27 January in Davos at the World Economic Forum the European Central Bank President, Monsieur Jean-Claude Trichet, stated boldly that “the euro is not in crisis”. He must have felt duty-bound to say that in an attempt to reassure international financial markets, regardless of what he really thought. If he actually believed what he said, then Monsieur Trichet is in denial, which is a poor foundation both for a fruitful discussion of the current crisis of the euro and for progressing towards its solution.

Of course, if one looked exclusively at the current exchange rate between the dollar and the euro and its recent trend, one would get the false impression that there is no crisis. On 29 January the euro stood at $1.37, a higher rate than before the Greek debt crisis erupted in February 2010 ($1.33), and much higher than the $1.18 rate to which it plunged in early May 2010 (and even that was 1cent higher than the initial exchange rate of 1.17 with which the euro started life in 1999). The euro recovery, however, was due primarily to the US Fed injecting $600bn liquidity over 8 months, compared with the comparatively restrictive policies of the ECB, and to US economic prospects being poorer than anticipated. After peaking at $1.42 last November, the euro fell again under $1.30 repeatedly (even a fortnight ago) with contagion spreading from Greece first to Ireland, then to Portugal, then threatening Spain.

Beside the exchange rate increased volatility, and the downgrading of credit ratings, a tangible and accurate measurement of the sovereign debt crisis of the euro is given by each country’s interest rate differential with respect to German bonds (usually taking 10-year bonds), the current yield on existing stock determining the rate at which the countries can borrow to rollover old debt or incur new debt. The spread over the German Bunds (whose yield has also risen as a result of the crisis, for fear of German exposure to baling out possible defaulters) has risen on average and significantly widened across countries over time, especially since the Greek crisis, and is now at record levels, higher than last May. Usually a 2% differential is regarded as the danger level; today Spain is just over, Italy just under that level; Portugal has almost 4% differential, Ireland over 6%, Greece 8 and a half per cent.

At interest rates higher than national growth rates (whether in nominal or real terms, as long as both are measured in the same way) national debt must increase relatively to GDP; debt is unsustainable and default looms. Even on the funds provided by the EFSF (the European Financial Stabilisation Facility set up last May) Greece and Ireland pay 5.8%, a rate lower than their market rates but higher than sustainable and signalling European lack of confidence in these countries’ ability to repay. Rescheduling of Irish and Greek debt – with lengthening of maturities and inflicting a haircut on investors – is now on the cards.

It is true that a recent bond issue by the EFSF was five times over-suscribed, but this was mostly “spurred by Basel III capital rules” set by the BIS, according to which AAA-rated sovereign bonds like those of EFSF “have a risk-weighting of 0%, which means that investors effectively don’t need to hold capital against it”. And that rating involves the EFSF over-collateralising its bonds reducing its operational capacity, and even EFSF bonds are subject to risk (for instance from the downgrading of one of the participating countries, which would require further capitalisation, see Klaus Regling, Eurointelligence.com 27 January).

The ultimate source of euro vulnerability is its premature birth. The single currency was supposed to be the crowning of the economic integration process, after political and fiscal union, after the unification of labour and social policies and, come to think of it, after a common foreign policy and a common army (though these could wait). Instead of which the single currency has been used to promote the so-called finalité politique, i.e. that political union that should have been the pre-condition of the euro. This is like a person buying clothes that are too tight and do not fit in the hope that this might facilitate slimming, by forcing one to diet: it does not work for me, it did not work for Europe. The fiscal constraints imposed by the Maastricht Treaty and the Growth and Stability Pact, 3% public deficit and 60% public debt, have not been observed by too many countries for too long (including Germany and France, who were first to violate the 3% ceiling), to be treated as substitutes for a fiscal union. Thus the initial fall and convergence of interest rates that occurred after the introduction of the euro have been reversed. The global crisis has lowered tax revenues and raised public expenditures, not least for rescuing financial institutions. Europe has reacted too slowly and inadequately to the sovereign debt crisis over the last year; European leaders have spoken with dissonant voices, often making perverse announcements, whether from ineptitude or malice.

Can the euro crisis be solved, or at least be significantly alleviated, by the issue of a single European bond covered by a European guarantee, to replace a sizeable tranche of national debts? This we will consider in one of the next posts.

Dr Marchionne’s Vietnam War

[SEE POSTCRIPT/UPDATE, POSTED BELOW AS A COMMENT]

In 1968, at the height of the Tet offensive, I argued with US sociologist Edward Shils (1910-1995) at Cambridge about the uselessness, wickedness and immorality of the Vietnam war. Shils shut me up curtly by saying that the US were in Vietnam simply “because they can”, and there was nothing more to be said. And so they could, of course: the US had the troops, the military hardware, the financial resources to do it, and they could get away with it, wanting to get away with it (at the time). Which of course did not imply that the war was in the US' best interests, that it was justifiable, or that the US would win it in the end. Shils lived long enough to see the inglorious débacle of the US last exit by helicopter from the roof of the US Embassy in Saigon.

In 2010 FIAT's Sergio Marchionne adopted an antagonistic industrial relations strategy towards his employees, first at the Pomigliano d’Arco plant in Southern Italy and then at the Mirafiori plant in Turin. Either FIAT employees accepted greater internal flexibility, duration and intensity of work or FIAT would invest an alleged €20bn elsewhere, notably in Serbia and in Canada. At Pomigliano a workers' referendum endorsed the deal but the overwhelming majority of over 60% was judged insufficient by Marchionne. At the Turin Mirafiori plant on 29 December FIAT signed an agreementwith all unions (Fim, Uilm e Fimsic) except with the traditionally more militant FIOM metalworkers. Now a referendum has been called on 13-14 January, and FIOM has called a general strike for 28 January inviting not only metalworkers but all "social opposition forces" from students to movements opposing water privatisation.

Marchionne’s attitude is reminiscent of Shils’ views on the Vietnam War: FIAT is fighting the metalworkers’ Trade Union FIOM “because it can”. Globalisation has dramatically increased labour markets competition in the world: labour migrations and production de-localisation are the more spectacular forms of such intensified competition, but trade liberalisation is its most important quantitative manifestation. Even if existing factories stayed for ever where they are, new production would naturally follow the logic of global comparative advantage. This is what has reduced the average share of wages in GDP in advanced countries from 65% to 55% in 1980-2005 (IMF World Economic Outlook June 2007), a trend that has continued to date except for a small rise in wage shares in 2009 due to the temporary fall of profits in the recession. This is what allows FIAT to give such a blunt ultimatum to its workers: take it or leave it, don’t even think you can negotiate anything else.

The former communist leader Piero Fassino – now candidate as mayor of Turin, FIAT’s headquarters – has stated that were he a FIAT employee he would support the proposed deal and vote Yes in the coming referendum. Other Democratic Party politicians have dissented: Marchionne has already succeeded in splitting not only the Unions but also the main Opposition party. (See Antonio Lettieri, "La sinistra ai piedi di Marchionne", Il Manifesto, 8-01-2011).

One’s vote in such a referendum is not necessarily a reflection of one’s politics, but of family circumstances and wealth. Were I a FIAT employee, faced with the brutal alternative between unemployment and a worsening of my labour conditions I too might well vote Yes in the referendum. Which does not imply that the deal is in FIAT’s best interests, indeed that it is necessarily superior to other deals reachable after negotiation, or that its political/social implications are desirable, especially in the long run.

Some aspects of the proposed deal are very disquieting. The proposal has not been discussed beforehand, even within those Unions that have supported it. Such referendums, overriding union leadership, are unprecedented so that there are no set rules: at Pomigliano a yes vote of over 60% was regarded as insufficient for FIAT to go ahead with investment; at Mirafiori Marchionne demands only “over 51%”. An unintended consequence of existing Italian legislation involves FIOM members losing the right to union representation unless FIOM signs the deal. This could be rectified easily by either government decree or by an additional provision in the agreement with FIAT, before the referendum takes place, but neither Italy’s weak, absentee and corrupt government nor FIAT have taken the initiative, in spite of protestations by several unions and politicians and not just by FIOM. The threat of losing union representation poses additional and improper pressure on FIOM members. The deal marks the end of collective bargaining – which is, among other things, an integral part of the European Social Model – and marks the re-emergence of enterprise-level bargaining outside medium and small size firms. FIAT has had to leave the Confederation of Italian Industries in order to replace the standing collective contract, but metalworkers could also be moved to the new contract in other enterprises that followed FIAT’s example.

A major problem is that FIAT’s so-called “Fabbrica Italia” project does not really guarantee FIAT’s employees anything at all. The €20bn investment “envisaged” – with an unspecified time-horizon – exists only in the vaguest and most nebulous industrial plan not worth the paper on which it is not written. So far only €1,3bn have been “planned”, only another €700mn have been identified at the very outset.

The new contract would be signed with a New Company, a joint venture with Chrysler. As is always the case with multinational companies, including joint ventures, the distribution of profits between FIAT and Chrysler would depend on transfer prices of components between the two partners. The criteria for such distribution has not been remotely faced by the parties, or even raised by the Unions.

The greater flexibility, the acceleration and prolongation of worktime involved in the deal seem too minor to really impact FIAT’s global competitiveness but represents merely a net worsening of working conditions. They are 1) a shortening of 10 minutes per day in work pauses (three 10’ pauses instead of two 15’ and one 10’ pauses) compensated by €0.1877 per worked hour or roughly €45 per month; 2) the postponement of the 30 minutes meal break to the end of the shift; 3) loss of illness allowance for period of “anomalous absenteeism” to be assessed case by case by a joint committee; 4) up to 18 8-hour shifts over six working days; 5) up to 120 hours overtime work without having to negotiate with the Unions, plus another 80 hours with union agreement; 6) in case of strikes or other breaches of contract FIAT would not be liable to honour union permits and payments.

Would such greater internal flexibility, prolongation and intensification of work solve FIAT’s problems and miraculously restore competitiveness in a sector affected by world-wide supply over-capacity and demand recession? (see a letter endorsed by 146 Italian economists on the subject, on the Sbilanciamoci website. )

Fact 1. In 2009 FIAT produced 650 thousand cars in Italy, barely a third of those produced in 1990, compared to a planned 2mn and to the stability and growth of quantities produced in the major European countries. The stated intention of more than doubling output seems over-optimistic.

Fact 2. FIAT spends on productive investments, and on Research & Development, shares of turnover significantly lower than those of its main European competitors, and it is not active in the development of low environmental impact alternatives. European competitors of FIAT, like Volkswagen, have responded to crisis by reducing working hours while protecting wages and employment.

Fact 3. While in 2004-2008 FIAT recovered from a very serious crisis and developed a few models, in the last two years FIAT has not introduced any new models; its market share in Europe has fallen to 6.7%, the largest drop in car output shares in Europe in 2010.

Fact 4. In 2010 Fiat shares rose 90%, beating all competitors, also following the recent split of Fiat Industrial from the rest of the company involved in car production. In the third quarter of 2010 FIAT was first in the Italian stock exchange in terms of shareholder value, with a 33% return on capital.

Fact 5. In spite of the rhetoric of FIAT depicted as an enterprise “capable to walk in the market on its own legs”, from the end of the 1980s and the early 2000s FIAT has enjoyed public subsidies of the order of €500mn per year. Perhaps FIAT should have been given subsidies to deal with the crisis by the Italian government, or at least Marchionne should have asked.

Fact 6. Over the last ten years FIAT global employment in car production has fallen from 74 thousand to 54 thousand units, of which only 22,000 are in Italian factories. Employees have average skill levels lower than those of FIAT’s competitors, and among the lowest wages in the sector in Europe.

Fact 7. In 2004-2009 Dr Marchionne earned €36.6mn euro, including the accumulation of his golden handshake, i.e. €6.3mn a year. Plus 4million free shares, worth 69.8mn on 7 January 2011, which will have appreciated further already since then. This brings his yearly income to €38.8 mn a year (See Massimo Mucchetti, "Marchionne e lo stipendio del dipendente FIAT", Corriere della Sera, 9 January 2011), which corresponds to 1,037 times the average yearly cost of Italian metalworkers' labour over the same period. Not that this matters for the plausibility of FIAT’s industrial policy stance but certainly not an irrelevant consideration in providing a perspective for the average FIAT metalworker, whether or not she is a FIOM member.

[SEE POSTCRIPT/UPDATE POSTED BELOW AS A COMMENT]

A Very Happy (Digital) Christmas

A Very Happy Christmas to all readers.




Normal Blogging will resume in the New Year.