Inflationary Pressure and Labor Conflict Inflation in the 1960s jeopardized the corporatist wage...
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Inflationary Pressure and Labor Conflict Inflation in the 1960s jeopardized the corporatist wage structure of the postwar period In the late 1960s work
Inflationary Pressure and Labor Conflict Inflation in the 1960s
jeopardized the corporatist wage structure of the postwar period In
the late 1960s work stoppages began to occur where workers demanded
higher wages
Slide 2
Factors Leading to Friction in the Labor Market 1) Decline of
agricultural workers to less than 15% of employment continent-wide
Elastic supplies of labor in underemployed agricultural workers no
longer exists 2) Unemployment as a whole declined leaving the
threat of unemployment as a restraint on wage demands as no longer
a viable option 3)Wage and price inflation did not subside even
when unemployment rose, which indicated there were other factors at
work Young no longer remembered what it was like to be unemployed
People were no longer willing to sacrifice themselves for postwar
reconstruction and preferred immediate gratification instead
Slide 3
Factors Leading to Friction in the Labor Market (cont.) 4) The
Soviet threat was seen as less immediate, removing one immediate
incentive for labor and capital to pull together 5) Another
important event in this time period was the weakening and final
breakdown of the Bretton Woods system in the 1970s Exchange rates
were fixed and then inflation became temporary, with its breakdown,
this was no longer the case Unions started to fear inflation and
wanted wage increases
Slide 4
Friction in the Labor Market (cont.) Wages started to grow but
production slowed Profits began to fall right before the 1973-1974
oil price shock Governments tried to contain inflation with
controls (such as a statutory freeze on wages and prices) These
tactics were not very successful
Slide 5
Contradictions of Corporatism
Slide 6
1973 OPEC Oil Crisis and the Rise of Oil Prices
Slide 7
Contradictions of Corporatism Countries began to promise
workers more benefits in exchange for wage restraint But, financing
these benefits was very expensive Where the institutions of
corporatism were most advanced, their reinforcement limited the
rise in labor costs and the rate of unemployment After the wage
explosion of 1974-75, wage increase slowed Inflation wasgetting
worse and making things difficult to handle Keynesian demand
stimulus was used to keep unemployment levels down However, the
golden years of Europe were over
Slide 8
Contradictions of Corporatism (cont.) Recession came about The
2 nd OPEC oil-price shock at the end of the 1970s made things even
worse Unions no longer wanted to practice wage constraint Public
employment (and hiring) had gone up for the last recession and was
no longer a viable option to use Social corporatism began to
crumble and by the mid-eighties it was in retreat
Slide 9
Retreat Into Regional Integration European governments tried to
create economic stability with the process of European integration
UK, Ireland, and Denmark joined the EEC A new system needed to be
put in place to replace the now defunct Bretton Woods system
European countries did not want uncontrolled exchange rates
Europe's response was The Snake - December 1971 Participating
countries held their exchange rates within narrow margins and
established financing facilities to extend credits to one another
However, they still lacked a convergence in their monetary and
fiscal policies
Slide 10
Retreat Into Regional Integration (cont.) Countries with
inflationary policies were driven from the Snake The UK was the
first to withdraw in June 1972 Denmark withdrew one week later but
returned in October Italy withdrew in 1973 France was forced to
float in January 1974 Sweden withdrew in 1977 Norway withdrew in
1978
Slide 11
The Snake
Slide 12
Retreat Into Regional Integration (cont.) France and Germany
wanted political and monetary integration for exchange rate and
inflation stability A new system came about in 1979 European
Monetary System A better version of the Snake Participants had to
hold their currencies within 2.25% to fluctuation bands, but
countries were allowed to revalue and devalue 8 out of the 9 EC
members joined the EMS at the beginning (except UK) No one was
forced to withdraw in the 1980s although there were realignments
Yet the poor coordination of macroeconomic policies strained the
EMS
Slide 13
Rising Unemployment and the Integrationist Approach The 1980s
were a decade of dissapointment for growth and productivity for
Europe Unemployment was still high Causes of the problem
1)Inadequately flexible wages 2)Overly rigid work rules 3)Excessive
labor costs
Slide 14
Rising Unemployment and the Integrationist Approach (cont.)
Another solution was looked at in integration deeper integration
adding free movement of capital and labor to the existing customs
union The aim was to be like the US so European producers could
exploit economies of scale and compete internationally This came
with the Single European Act (SEA) in 1986 signatories agreed on
the creation of a single market free of internal barriers to trade
The Maastrict Treaty (early 1990s) was the next step There was a
commitment to move to a monetary union (a single monetary policy, a
European Central Bank and a single currency)
Slide 15
Rising Unemployment and the Integrationist Approach (cont.)
Removing capital controls was important for monetary integration
The elimination of controls made the EMS more fragile because
countries were now faced with destabilizing capital flows If
investors thought a country was going to realign its exchange rate,
there was a massive outflow of funds There were no more
realignments Fixed Exchange Rates, International Capital Mobility
and Monetary Independence are mutually incompatible Europe had to
choose between fixed exchange rates and independent monetary
policies Common currency was the best option
Slide 16
Rising Unemployment and the Integrationist Approach (cont.) For
countries other than Germany which had to follow the Bundesbank's
policies, now they could have more say in their monetary destinies
They had no representatives on the Bundesbank but would have
representatives on the ECB An alternative to this was to face
FX-volatility
Slide 17
Rising Unemployment and the Integrationist Approach (cont.)
Guided by the Delors Report, a three-step transition of the
Maastricht Treaty to a monetary union: 1)Stage I (1990-93):
countries bring their national economic policies more closely in
line, remove remaining capital controls and butress the
independence of their central banks 2)Stage II (1994-1998): further
convergence of policies and by creation of a transitional entity,
the European Monetary Institute, to plan the move to a monetary
union 3)Stage III (starting in 1999): monetary union itself
Slide 18
European Economic and Monetary Union Stage III: Austria,
Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg,
Netherlands, Portugal and Spain join the EMU in 1999 Greece joins
in 2001 Slovenia joins in 2007 Cyprus and Malta join in 2008
Slovakia joins in 2009 Denmark, Sweden and United Kingdom refused
to join Estonia joined in 2011 Potential new members (no exact date
can be given due to the current Eurozone crisis): Lithuania
(previous target 2010) Poland, Latvia and Czech Republic (previous
target 2012) Hungary (previous target 2013) Romania (2014) Bulgaria
(2015)
Slide 19
Slide 20
The Crucible of Integration Collapse of centrally-planned
system had the biggest impact on Germany where there was
immigration from the East Germany proposed reunification of both
Germanys the Soviet Union was not in a position to object Eastern
Germany came under Western Germany's wing Living standards were
lower in the East, there was outdated infrastructure and equipment
In 1991 the new lander accounted for 20% of Germany's labor force
but less than 7% of its GDP There was still a strong incentive to
migrate west The East was also cheap labor threatening unions
Slide 21
Germany's Integration The Bonn Government responded by giving
the same benefits and wages to the East that the West had This
helped to lower migration to West and bring up their productivity
These transfers of money gave Germany deficits Germans did not want
to pay higher taxes and this led to higher interest rates since the
Bundesbank did not intervene Interest rates were hitched due to the
pegged exchange rates of the EMS this affected all of Europe
Unemployment in the whole continent rose This turned into a crisis
that disrupted the progress of Europe's integration
Slide 22
Integration in Distress... Denmark rejected the Maastricht
Treaty in a referandum in June of 1992 This raised the possibility
that a monetary union might not happen Speculators anticipated that
the Bank of England and the Bank of Italy would respond by cutting
their interest rates and allow their currencies to depreciate
(could not be done before because of the prospect of the monetary
union) Speculators pounced on their currencies This drove Italy and
England out of the EMS Their currencies depreciated by 30%
Slide 23
Integration in Distress... Spain, Ireland and Portugal were
also forced to devalue several times By 1993 the crisis affected
France whose currency was one of the center currencies of the EMS
The EMS bands were finally widened from 2.25% to 15% This allowed
speculators to retire to the sidelines and for European financial
markets to settle down Governments again began pursuing the
Maastricht Criteria
Slide 24
Integration in Distress... Unemployment though was still high
Corporatism was in decline and this caused high wages and non-wage
costs Europe needed to cut hiring and firing costs Within all of
this the Maastricht Criteria began to mean unemployment for a lot
of European countries
Slide 25
The Collapse of Central Planning Centrally planned economies
broke down completely at the end of the 1980s Eastern Europe just
could not keep up with the new technology and production of the
West In order to keep going Eastern Europe had borrowed a lot of
money from the West and the US in the 1970s (about $70 billion by
the end of the 1970s) This finally led to a debt crisis in 1981-82
To pay of its debts and keep its economies going, the Eastern
European countries began to let market principles creep in In the
end economic freedom and political repression proved incompatible
Central planning collapsed
Slide 26
Difficulties of Transition Eastern Europe had a way difficult
transition to the market Between 1990-1992 output and employment
plummetted
Slide 27
Difficulties of Transition
Slide 28
These countries needed to reallocate resources from the
production of heavy machinery to consumer goods they needed to go
from manufacturing to services Obviously this would bring down
output Western Europe had the same challenge after WWII The
difference was the Marshall Plan There was no Marshall Plan for
Eastern Europe Liberalization needed to take place to give managers
incentive to make profits and avoid losses
Slide 29
Difficulties of Transition
Slide 30
Radical transition happened The front runners in the transition
were Hungary, Poland and Slovenia
Slide 31
Europe in the 21 st Century In economic sense Europe in 1948
and Europe today look very different
Slide 32
Links between Europe of Yesterday and Today... 1)Shift to
intensive growth 2)Governments increased spending and hiring to
keep labor happy now leading to massive unemployment and higher
taxes 3)Regional integration 4)Major financial crisis
Slide 33
Based on Benjamin Cohens article Monetary Governance in a World
of Regional Currencies
Slide 34
Deterritorialization of Money Circulation of national
currencies no longer coincides with territorial boundaries of
nation- states Dollar and Euro used widely outside their origin
competing directly with local currency for both transactions and
investment purposes Called currency substitution (effect of
globalization) Before there was a monopoly of currency now there is
an oligopoly Another alternative has been to replace national
currency with a regional money
Slide 35
Currency Regionalization Currency Regionalization occurs when
two or more states formally share a single money 1.Currency
Unification: Countries merge their separate currencies into a new
joint money (ex: EU and the Euro) ALLIANCE 2.Dollarization: Any
single country can unilaterally or by agreement replace its own
currency with an already existing other currency (ex: Monaco,
Panama, Ecuador, El Salvador) - FOLLOWERSHIP
Slide 36
Darwinian Struggle of Currencies The number of currencies in
the world is declining Although not all national currencies will
dissapear due to national pride 1.Currency Unification: Monetary
Sovereignty is pooled (ex. ECB) 2.Dollarization: Monetary
Sovereignty is surrendered (ex. Countries following the US $)
Slide 37
Currency Choices 1)Traditional Sovereignty 2)Monetary Alliance
3)Formal Subordination Economic globalization is leading nations to
reconsider traditional monetary sovereignty
Slide 38
Currency Regionalization 50 years ago, national monetary
systems were generally insular and strictly controlled In the 1950s
barriers separating local currencies began gradually to dissolve
This was partly due to increased trade Facilitated increased flow
of funds between states It was also partly due to increased
competition, technology and innovation Currency substitution began
to take hold
Slide 39
Currency Regionalization Capital mobility another effect of
globalization Led to the integration of financial markets Money is
now being used in many different ways: Store of value Investment
medium Medium of exchange
Slide 40
Currency Regionalization Foreign currency notes in the
mid-1990s accounted for 20% or more of the local money stock in as
many as three dozen (~36) nations inhabited by one-third of the
world population 25% - one-third of the worlds money supply is now
located outside its country of issue Currency substitution is most
popular in: Latin America, Middle East, Former Soviet Union states
favor the US $ Balkans, East-Central Europe favored the DM and now
the
Slide 41
Currency Substitution By the mid 1990s there were at least 18
countries that had 30% of their money supply in another currency
Most extreme cases (over 50%): Azerbaijan, Bolivia, Croatia,
Nicaragua, Peru and Uruguay Another 39 countries were approaching
the 30% level indicating moderate penetration
Slide 42
Currency Substitution Some economists wonder how this will
affect FX rates Traditionally FX: Fixed Exchange Rates Single
Currency Basket of Currencies Flexible Exchange Rates Managed Left
to the market of supply and demand Recently FX: Contingent Rules
Corner Solutions Free Floating Monetary Union Irrevocable (Currency
Board) Target Zone
Slide 43
Currency Regionalization More is at stake than FX rates The
real question is of national monetary sovereignty Economic actors
are no longer restricted to a single currency and this has led to a
sort of currency competition
Slide 44
Currency Regionalization 5 main benefits of a strictly
territorial currency: 1. Potential reduction of domestic
transactions costs to promote economic growth 2. A potent political
symbol to promote a sense of national identity 3. A powerful source
of revenue (seigniorage) to underwrite public expenditures 4. A
possible instrument to manage the macro-economic performance of the
economy 5. A practical means to insulate the nation from foreign
influence or constraint
Slide 45
Seigniorage Seigniorage, also spelled seignorage or
seigneurage, is the net revenue derived from the issuing of
currency. It arises from the difference between the face value of a
coin or bank note and the cost of producing, distributing and
eventually retiring it from circulation. Seigniorage is an
important source of revenue for some national
banks.revenuecurrencyface valuecoinbank note banks
Slide 46
Currency Regionalization All of these are eroded when a
government is no longer able to exert control over the use of its
money So policymakers are forced to compete for the allegiance of
markets agents to sustain and cultivate market share for their own
brand of currency
Slide 47
Currency Regionalization Four Strategies are Available:
Considerations: Policy is defensive (preserve market share) Policy
is aggressive (promote share) Policy is unilateral Policy is
collective 1. Market Leadership Aggressive, unilateralist policy
intended to maximize the use of national money Predatory price
leadership 2. Market Preservation Status-quo policy intended to
defend a previously acquired market position for the home
country
Slide 48
Four Strategies (cont.) 3. Market Alliance Collusive policy of
sharing monetary sovereignty in a monetary union of some kind 4.
Market Followership Policy of subordinating monetary sovereignty to
a stronger foreign currency via a currency board or full
dollarization Passive price followership Strategy of Market
Leadership only available to countries with the most widely
circulated currencies ($, , Yen,...) For other currencies only the
other three choices remain
Slide 49
Currency Regionalization The question is: What constraints on
national policy are states willing to accept? Market Preservation:
Keep their traditional monetary sovereignty Many states still
choose this route regardless of how uncompetitive their currency
may be Monetary Alliance: Join a union and delegate some of that
authority Market Followership: Give up all monetary sovereignty
Produce their own money or buy it from someone else
Slide 50
Currency Regionalization Monetary Sovereignty can be defended
with tactics of: Persuasion: trying to sustain demand for a
currency by supporting its reputation Coercion: applying formal
regulatory powers of the state to avert any significant shift by
users to a more popular foreign money Ex: laws that dictate what
money creditors can accept for debt, limits on foreign currency
deposits, exchange restrictions
Slide 51
Defending Monetary Sovereignty These tactics can become
expensive as currency competition accelerates May lead to less
growth and more unemployment Due to this, many countries have begun
to consider the solution of a monetary union either in the form of:
Dollarization: (ex. Latin America) Not difficult to imagine two
giant monetary blocs (US and EU and maybe possibly Japan as a third
bloc) due to increased dollarization Currency Unification (ex. EU)
Much will depend on the policies of the market leaders and will
alter the costs and benefits of followership
Slide 52
Benefits of Monetary Leadership Additional opportunities for
Seigniorage Enhanced degree of macroeconomic flexibility May yield
dividends in terms of power and prestige This could lead
US-EU-Japan to offer incentives to potential dollarizers Risks of
Monetary Leadership: Policy constraints to consider the needs of
followers
Slide 53
Monetary Decisions Another option is to join a currency union
Examples are the EMU, CFA Franc Zone in Africa, Eastern Caribbean
Currency Union (ECCU) in the Caribbean EMU is a test of pooling
rather than surrendering monetary sovereignty
Slide 54
The Rise of Currencies... Presently there are more than 170
central banks in the world 100 years ago there were fewer than 20
If there are more than 100 currencies could this really lead to
stability? Some economists argue that regionalization of currencies
is a no-brainer
Slide 55
Policy Considerations Alliance or Followership? Will depend on:
Issuing of Currency Management of Decisions
Slide 56
Currency Issue Highest degree of currency regionalization is
when a single money is used by all participating countries This is
the way dollarization works Ex. Lichtenstein and Micronesia EU and
ECCU are other examples
Slide 57
Fully Dollarized Countries US $US Virgin Islands, Caribbean
Netherlands, El Salvador, Marshall Islands, Micronesia, Palau,
Turks and Caicos Euro Andorra, Kosovo, Montenegro, San Marino,
Vatican City, Monaco New Zealand $Niue, Pitcairn Islands, Tokelau
Australia $Nauru South African RandSwaziland, Lesotho, Namibia
OthersArmenian Dram Nagorno Karabakh; Russian Ruble South Ossetia
and Abkhazia; Indian Rupee Bhutan and Nepal; Swiss Franc
Lictenstein; Israeli shekel Palestenian territories; Turkish lira
TRNC;
Slide 58
Currency Issue (cont.) Parallel circulation of two or more
monies (still dollarization) Ex. Panama uses US $ and locally
issued coins (Panamanian balboas) Near-dollarized countries foreign
currency dominates domestic money supply but falls short of
absolute monopoly Lower degree of dollarization than full
dollarization
Slide 59
Near-Dollarized Countries CountryCurrency UsedSinceLocal
Currency EcuadorUS$2000Sucre El SalvadorUS$2001Colon
KiribatiAustralian $1943Own coins PanamaUS$1904Balboa
TuvaluAustralian $1892Tuvaluan dollar East TimorUS$Own coins Cook
IslandsNew Zealand $Own coins
Slide 60
Currency Issue (cont.) Even lower degree of dollarization
Currency Board Home money accounts for a large part of domestic
money supply however its issue is firmly tied to the availability
of a designated foreign currency referred to as anchor currency The
exchange rate is fixed between the two countries Both currencies
circulate as legal tender Any increase in local money supply should
be backed by an increase in the reserve holdings of the anchor
currency Ex. Bulgaria, Lithuania (Argentina was of this group until
the collapse of 2002)
Slide 61
Currency Board CountryAnchor CurrencySinceLocal Currency
BermudaUS$ Bosnia and Herzegovina Euro (formerly DM)1998Bosnian
marka Brunei DarussalamSingapore dollar1967Brunei dollar
BulgariaEuro (formerly DM)1997Lev Cape VerdeEuro1999escudo Cayman
IslandsUS$ Comoros IslandsEuro (formerly FF)1979Comorian franc
DenmarkEuro1999Danish Kroner DjiboutiUS$1949Djibouti franc Hong
KongUS$1983Hong Kong dollar LatviaEuro2005Lat LithuaniaEuro
(formerly US$)2002Litas MacaoHong Kong $ MoroccoEuro1999Dirham Sao
Tome e PrincipeEuro2010Dobra
Slide 62
Currency Issue (cont.) Lowest Degree of Dollarization
Bimonetary Relationships Legal tender status is extended to one or
more foreign monies but without the formal ties of a currency board
Local money supply is not dependent on availability of anchor
currency Exchange rate is not irrevocably fixed Ex. Bhutan, the
Bahamas
Slide 63
Bimonetary Relationships
Slide 64
Monetary Alliance Parallel circulation of 2 or more currencies
is also consistent with a monetary alliance