Wage Pressures, Falling Commodity Prices Spell Trouble for the Global Economy
With no recovery in the Eurozone and the whole of Eastern Europe in trouble, greater turmoil in Asian economies could bring the world economy to a critical moment, says economist Heiner Flassbeck
SHARMINI PERIES, EXEC. PRODUCER, TRNN: Welcome to the Real News Network. I’m Sharmini Peries coming to you from Baltimore.
With the fluctuating markets in China, the plummeting oil prices, the world economy appears to be headed for another period of uncertainty, at best. However, President Obama in his State of the Union on Tuesday says that the U.S. economy was the strongest and most durable economy in the world. Let’s have a look.
PRESIDENT BARACK OBAMA: Let me start with the economy, and a basic fact. The United States of America right now has the strongest, most durable economy in the world. We’re in the middle of the longest streak of private sector job creation in history.
PERIES: Now joining us to talk about what is happening in China, Europe, and the stability of the world’s markets, as well as what’s happening in the U.S., is Heiner Flassbeck. Heiner was the director of the Division on Globalization and Development Strategies at UNCTAD, and he is co-author of Against the Troika: Crisis and Austerity in the Eurozone, which he wrote with Costas Lapavitsas. Heiner, very good to have you back on the Real News Network.
HEINER FLASSBECK: Thanks for having me.
PERIES: So Heiner, let’s start with the implications of the fluctuations in China, having on the global markets.
FLASSBECK: Well, first of all, the slowdown of China is quite remarkable. I did not expect it would be that strong as it seems to be, now. But clearly we have accelerations on the financial market as usual, so it is not a direct reflection of what happens in the real economy in China. But nevertheless, it’s a big turmoil. It’s a dangerous situation. And the most critical thing is that more and more countries are coming under pressure. We have a falling, depreciating exchange rates in many emerging markets. We have the huge drop in commodity prices, which is a big problem for the emerging markets, or many emerging market countries. And we have a eurozone that is still in absolute stagnation, without any progress.
PERIES: And Heiner, what are the underlying reasons that the Chinese markets are having these fluctuations?
FLASSBECK: Well, I think in China what we see is something rather normal. They had a huge housing bubble, and this is correcting now. It couldn’t go on forever, so now it seems to be the time where the slowdown begins. This is still a normal thing. The problem is that the rest of the world is in very bad shape. If the rest of the world would be growing in a quite normal way, which would be creating jobs all over the place, then we would not even listen to the news from China. But the rest of the world is in a very, very fragile condition. And the rest of the world out of the United States, the United States are a [bit of an] exception indeed. But out of the United States we didn’t even have a recovery after the financial crisis.
You see Europe, for example, which is quite a strong, it should be quite a strong economy. It’s still below, much below the levels of 2008, and it has not recovered in the last three years. So this is a big burden. And the whole of Eastern Europe is in trouble. And if Asia now also gets into trouble to a certain extent, then it’s really a critical moment for the world economy.
PERIES: And give us some of the indicators of what’s causing the [un]stability in Europe, for example.
FLASSBECK: Well, in Europe it’s rather simple. Europe, we have just wrongheaded policies. We have fiscal policy that tries to, to save into the recession, in the midst of the recession, which is plain nonsense, as we know. We have huge pressure in Europe on wages, which is a, a global problem. But in Europe it’s particularly strong. The pressure on wages of people do not have positive income expectations. And so we do not have a revival of global–of private consumption. And all over the world we have more or less no investment. Which is, which is a funny thing if you look back, because, you know, when you look back to the ’70s or ’80s when the people like Thatcher or Reagan came and said, now capitalism has to be revived. We need supply-side policies and not demand-side policies.
What they all expected was that investment would be booming, and so to say automatically give, without any friction and any, any problem. But we have now the lowest investment share in the Western world in the last 40, 50 years. And despite the fact that many companies are sitting on huge cash reserves, they do not spend it in investment in machinery and equipment. And the main reason for all of that, for all of that, is clearly that we have a brave new world of market economy or capitalism, however you want to call it. We have this pressure on wages. This is also a phenomenon in the United States. The United States’ recovery is better than in most of the countries of the rest of the world. So far the president was right. But nevertheless, it is not as strong as it could be. And it has been in the past.
And the reason is exactly the same. They have pressure on wages of workers, and not participating in a way that they have in the past. And they’re not expecting to participate anymore because of the famous flexibility of the labor market that should make wages downward, flexible. And so we don’t get positive income expectations, and no stable increasing and accelerating demand from the private households.
PERIES: Now, Heiner, was President Obama correct when he said that we have the strongest and most durable economy in the world?
FLASSBECK: That is indeed, it’s sad to say, because it’s so weak compared to what you had in the past in the United States and what, as I said, it could be. But it’s true, because the rest of the world is in such a big trouble, and in particular Europe, which can be best explained compared to the United States, Europe is, is a plain disaster. It’s a pure disaster, and it’s clearly lead by, by German kind of ideology on economic policy, that the government should never spend money, there should be no–the deficit should be cut in the midst of recession, so everybody should save. Which is also really, really outdated economics. But it’s–nobody’s really, really strongly questioning it in Europe.
PERIES: Heiner, what is the impact that the low oil prices are having on the European market, and then globally?
FLASSBECK: Well, globally, first of all for the industrial nations, clearly it’s, it should be kind of a stimulus because oil is cheap, so people can spend money on other things. But the big but is that the oil producers are in trouble, and so for the world as a whole, it’s a zero-sum game that some people are winning but the rest is losing. So it’s not really a stimulus for the world economy as a whole, because the oil-producing companies that are doing that, actually, Russia and Saudi Arabia and all the others, they’re cutting down their public expenditure. They’re cutting down the budgets to adjust to the falling oil price. And so far, and they’re cutting down on imports. And so the imports are coming from the Western world. And so far we, we do not gain overall. And not to talk about the impact that this has on climate change.
Unfortunately, or funny, or surprisingly, nearly nobody talks about this. I mean, we had a conference in Paris, everybody declared we want to get rid of fossil fuels. And at the same time, fossil fuels are–the price of fossil fuels fall to record lows and people are consuming like hell. Well, this is not very consistent policies at the global level, also. But at the purely economic point of view it’s a dangerous signal. Overall, it’s not just oil, but it’s overall commodity prices. In the beginning it was clearly the end of what we call the financialization of commodity markets. So the speculative players, the investors, the purely financial investors want out of the market. So they increase the trend downwards. They strengthen the trend downward. But now I think it’s really the expression of a global economy that is slowing down in a rather dramatic way.
PERIES: And what is the, the lower oil prices, obviously it’s hurting places like Venezuela, Russia, Iran, and of course the Saudis and the markets that produce oil. But, but give us a sense of how deep that problem is.
FLASSBECK: Well, for these countries, there are many oil-dependent economies in the world. Take Russia. Russia is clearly very much dependent on the oil revenues. Saudi Arabia, not to mention. But there are many, many others, and they, as I said, they have to drastically cut their, their public budget, the government budgets. And they have to cut down on expenditures for their people, and their people cut down on imports. So as I said, this is not something which we should be, we should be happy about, because it’s producing for the world as a whole, not the stimulus some people are hoping for.
But in the short run, clearly for our economies, it should be, it should be a stimulus for a time. But you see, even this stimulus is not sufficient, is not sufficient at all, to get our economies over, over the threshold of the income, negative income expectations that we have created by ourselves, by our ideology that labor market should be flexible.
PERIES: And in terms of strengthening the economy going forward in 2016, what do you think are some of the key features that needs to be attended to?
FLASSBECK: Well, we, it’s absolutely clear that in the United States the monetary policy is reverting, is going back to a less expansionary stance. But let’s see how long that will, will drive the economy, how long the economy will have enough momentum to go with that. That’s a very open question. The attempt of the governments in the United States also to cut down on expenditure will be making the economy more fragile than it is. But again, the main, the main problem is Europe. Because in Europe, what we see is now huge, we have huge divergences. Competitiveness, the supercompetitive Germany on the one hand and the other countries on the other hand. And this is, as I said, putting pressure on wages everywhere, because in Germany wages are not really rising fast. They’re rising a bit more than before, but not really in a way that they should do.
So there is still an enormous deflationary pressure all over Europe. And we have no, no instrument to fight this. Really, the ECB, European Central Bank, is trying to do what is possible. But that is clearly not enough. We have seen they are coming to the end of what, what they could do. They had quantitative easing, interest rates are zero. So there are, there are not many options left. And fiscal policy, as I said, is the big, the big block. So the blockade comes from fiscal policy, because there in particular the German finance minister is threatening everyone who wants to, to spend a bit more money. And Germany in particular is the country that has a surplus. And it’s not only its current account. It has the biggest surplus of the current account of all countries in the world. But it has a surplus. And the government, the public budget, and this is a scandal, that the country that could really stimulate, that had the means to stimulate the European economy, is doing nothing.
And if you look at the figures it’s a dismal situation yesterday. We had industrial production again falling in November. And industrial production, imagine that, you cannot imagine that in the United States. Industrial production and production over construction industries is flat now, without any movement upwards since 2011 in Europe. This is absolutely incredible. Even in Germany it’s true. Germany has no increase, no increase at all, between 2011 and now in overall industry and construction. But nevertheless, the statisticians in one way or the other, I don’t know exactly how they do that, they’re creating positive GDP number [as well]. It seems to be quite a bit of fantasy behind these numbers.
PERIES: Heiner, we thank you so much for joining us today and hope to have you back very soon, because I think some of the problems you identified are not going to go away.
FLASSBECK: Right. You’re welcome, bye-bye.
PERIES: And thank you for joining us on the Real News Network.
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