Brussels, 06/11/2008
Dear Mr. Sarkozy, Dear Mr. Barroso,
The European Council meeting tomorrow and the G-20 top on 15 November in Washington are facing the challenge of putting the financial sector back at the service of the real economy. The model of ‘borrow to speculate’ with its drive for excessive profits has to end. Instead, the financial sector should be refocused on its key function to transform savings into productive investments.
Workers in Europe are now facing the damage and the costs inflicted by casino capitalism. Companies are massively restructuring, jobs are lost, unemployment is rising, wages and social security are coming under downward pressure and many pension savings have been destroyed.
The European Trade Union Confederation urges the European Council to make sure these things can never happen again and to be extremely ambitious by addressing all of the three dimensions of the present crisis:
Deep structural reform of the financial architecture: The financial sector is too important to be left to myopic bankers and greedy hedge fund managers. Instead of technical and piecemeal adjustments, we need reforms which fundamentally change the structure and the incentives of the financial architecture:
• A European Ratings Agency – Rating agencies, mainly based in the US, have played a key role in constructing the ‘borrow to speculate’ model and distributing ‘US-toxic’ assets throughout the world. A European Ratings Agency, not dependent on the banks for its funds, is necessary to ensure that this does not happen again.
• Address bonuses and cap top-level compensation – Bonus systems should no longer be allowed to reward short-term speculation but should instead promote the long term.
• A visible hand to guide liquidity, savings and credit into productive investment – Central banks should prevent asset bubbles from developing, not by keeping interest rates artificially high and thereby damaging productive investment as well. Instead, central banks should adopt a ‘hands-on’ policy by encouraging real economy investment and discouraging speculative activity. ‘Asset-based reserve requirements’ are a way to do so: for example, by forcing banks that are lending money to hedge funds speculating on oil and commodity prices to deposit 50% or more of the credit as a non-interest bearing deposit with the central bank.
• Ending tax havens – Tax havens have allowed banks to escape from prudential oversight and take on excessive risk, by helping to establish and develop a ‘shadow banking’ sector. At the same time, tax havens have offered tax evasion for the huge profits coming from financial speculation. Governments, by taking over banks, have now become the counterparts of tax havens and should use this position to put tax havens under serious pressure.
Do not let the real economy down: The crisis in the real economy risks to deepen the financial crisis and to turn disinflation into a deflationary trap. Policymakers urgently need to address the recessionary tide that is rolling into Europe:
• Deep interest rate cuts and neutral fiscal policy are highly necessary but are coming too late and are not enough to fight recession.
• To avert the recessionary tide that is now sweeping in, fiscal policy needs to turn expansionary, as well as to move fast to avoid negative growth expectations from becoming entrenched.
• To mobilise the power of acting together, Europe needs to coordinate a joint effort with Member States investing an additional 1% of GDP in the development of new industries, sustainable development and social housing.
• Finance for this needs to come from a European Growth Fund, issued by the European Investment Bank, thereby channelling excess savings from the rest of the world into investment projects inside Europe at a lower cost for public finances.
• Establishing a crisis committee, in which trade unions take part.
Ensure workers get a fair deal: Whereas financial deregulation is the facilitator of the ‘borrowing to speculate’ model, the underlying fundamental driver is the weakening of the position of labour in many countries over many years: inequalities have grown, economic progress failed to translate into real wage increases for everyone, precarious work and poverty wages are spreading. To sustain demand and growth in such a context, policy has resorted to ‘bubble-driven consumption’, thereby triggering exuberant asset price booms while pushing households into excessive debt.
This model can no longer work. ‘Speculation and bubble-driven growth’ have caused this mess. Fair wages and good jobs now need to become the new drivers of demand and growth:
• Strengthen collective bargaining institutions to ensure a downward floor to nominal wage growth – Wages must not be allowed to become the next domino to fall. To avoid a ‘Japanese-style deflation’, a downward floor of at least 2 to 3% nominal wage growth needs to be respected. Collective bargaining practice needs to be strengthened, the autonomy of social partners to organise and to act on labour market relations is to be strictly respected and decent wage floors need to ‘bite’ in each labour market. Such action will also have other benefits: it will stimulate companies to compete on the basis of investing in innovation instead of simply cutting wages and it will provide workers the confidence that the game is not rigged against them.
• Fight labour market segmentation by upgrading the rights of precarious workers – Jobs make up the other domino which is already falling. An avalanche of restructuring plans is being announced in many companies, and agency work and fixed-term work are also reducing swiftly as a result of the economic crisis. This is rapidly pushing up unemployment as well as public deficits and is undermining general confidence. Instead of reforms promoting ‘easy firing’ and longer working hours (i.e. the proposed weakening of the Working Time Directive), we now need reforms providing companies with the incentive to develop policies, such as in-house training and internal functional flexibility, which promote stable jobs.
• No international financial conditionalities undermining working conditions – The IMF can not be allowed to go back to its ‘old tricks’ of imposing social deregulation in return for currency lending. The European Union, in particular, cannot allow that the IMF imposes on European countries a multi annual freeze on minimum wages and/or excessive cuts in public sector pay. Nor should the European Union blindly follow IMF policy by linking European lending to such IMF loan conditions. If necessary, the European Union should develop its own assistance, linking financial lending with respecting the basic principles of the European Social Acquis.
I hope that you and your colleagues from Europe will take these points fully into account and also support the international trade union statement, which will be sent to you separately, to the G-20 crisis summit.
Yours sincerely,
John Monks
ETUC General Secretary
Further information:
See the ETUC Autumn 2008 report, entitled Do not let the economy down!, on the economic situation in Europe.
