IFI governance


Austerity and Inequality in Europe

12 October 2013 | Minutes

IMF/World Bank Annual Meetings, Civil Society Forum

Friday 11th October, 2013




Chair Maria Jose Romero, EURODAD

Peter Bakvis, International Trade Union Confederation

Nicolas Mombrial, Oxfam international

Rekson Silaban, Labour Institute, Indonesia

Mahmood Pradhan, Deputy Director European Department, IMF




Nicolas Mombrial, Oxfam International


Why should Oxfam do this? Oxfam could not stand by witnessing in Europe poverty issues emerge, which has been the case in UK.

Similarly the Red Cross has just published a report in Europe, and no doubt for similar reasons.


The stimulus in Europe has been 200 billion Euros, 4500 billion was aid to the financial sector.

We have been here before  – Oxfam’s experience of austerity and economic crisis is that it can take 25 years for living standards to recover.

In the report, Oxfam found that almost 1 in 3 people could be living in poverty by 2025. The findings show that where austerity has been harshest wages fell the most.


Austerity will also lead to more inequality. In 2011 the richest 10% took 25% of national income, while the bottom tenth took home just 3% of all income, in the EU. This reflected experiences we once witnessed in Bolivia. If nothing changes, some European countries could result in being some of the most unequal states in the world.


Austerity’s goal to reduce debt failed. In a range of countries and across the EU.



Oxfam believes there are alternatives. Investing in people and sustainable economic growth, and investing in public services, and to protect the aid budget which has an impact beyond Europe.


Where can we find the money? It is there. Oxfam fights tax evasion. Examining illicit financial flows, it is about $200 billion per year flowing from developing countries to advanced states.


There is also the potential for a new mechanism, such as the Robin hood Tax, which could raise over 4 billion euros just by taking shares, or 37 billion euros from taxing bonds, shares and derivative markets, just from 11 countries implementing.


Peter Bakvis, ITUC

Note the ITUC’s statement today which argues that three years of austerity and labour market deregulation is enough.


The ITUC commends the Oxfam report, and find the parallels to similar policies in developing regions over a decade ago particularly interesting.


Amongst the implications include reduced Official Development Aid, and in the labour movement as well sa within development organisations. Recall that Oxfam’s origins are in Greece responding to civil turmoil in the 1940s.


The long term consequences may risk the social cohesion and breakdown of the European model and relative social peace the region has enjoyed.


The report notes that the IMF has to some extent recognized the failure in its own terms, in particular the increase in public indebtedness in terms of debt to GDP ratios even if states have succeeded in cutting deficits.

Indeed the Troika has agreed to relax targets in borrowing and non-borrowing states.

Also IMF forecasts have now indicated that Europe will return to growth, noting that the research department attributed renewed growth to relaxed austerity targets. Note that more than half of Eurozone countries are now in recession, and that slight positive growth that is hoped for would not materially support employment.


Notably, in the area of labour there has not been much relaxation. Some of these reforms have a fiscal impact, even if minor, but most do not, such as reducing minimum wages, weakening recourse against unjust firing, shrinking statutory severance pay, weakening and/or dismantling sector level collective bargaining.


These have been defended by the IMF as growth-enhancing, in fact in the short term the impact is opposite and the IMF concedes that, by reducing worker protection and reducing their buying power and thus unemployment decreases as does demand.


In the long run all the evidence indicates these measures only have a marginal impact on growth, if at all, but they do increase inequality. E.g. the World Bank’s 2013 WDR on Jobs in Chapter 8 comprehensively reviews the literature and found that deregulation measures are “insignificant or modest” in terms of impact on growth. The OECD did a detailed examination of 22 OECD countries over a 17 year period, principally in Europe, and found no statistically significant impact of deregulation and increased flexibility led to growth, but did, yet again, find that inequality was increased, ads the World Bank study found.


The IMF’s studies have indeed found no impacts, in line with this, but one report which is somewhat of an outlier in June 2012, it found that over a medium term period deregulation of labour markets and social programs will increase GDP by 1.5%. In context, some European states have lost a quarter of GDP, while undergoing reforms with major social costs including increasing inequality.


What’s most intriguing about the paper of ‘Fostering Growth Now’ by the European department is an annex which identifies major structural deficiencies in the region, and did not ‘red card’ a single deficiency in labour markets, though it found them in many other sectors. However another annexe describes the specific structural reform measures put forward by the Fund, and more than half of the measures concern labour market and social protections, all of course reducing labour rights or reducing social protection.


The ITUC calls this approach a ‘fixation’, as why do so when the in-house work contradicts it. Another IMF paper, Jobs & Growth, includes a footnote on page 35, which suggests that IMF staff remain influenced by a now-discredited OECD study (and disowned by the OECD) from 1994, which suggests labour market deregulation promoted growth. Also the World Bank’s Doing Business indicator on labour, which the Bank has abandoned, has also been used in IMF reports to justify this approach.

There may be political reasons too, but perhaps that is best left to others.


The most far-reaching reforms have nevertheless been instituted by governments of the right in power, which suggest the IMF found willing partners for labour market deregulation. IT is sometimes easier for governments to victimize workers than address the red flag issues which the Fund identified, e.g. fixing financial sectors such as the Spanish banking system, or putting in place investment plans to address crumbling or non-existent infrastructure.


There is an interesting counter-example in the Oxfam report, which is Iceland. The government, nor the IMF, did not attack workers’ rights or collective bargaining, and social programs were protected. The government and the IMF worked with unions in the post-crisis period, leading to decreasing inequality.


In another case, Romania essentially destroyed its collective bargaining system in 2010-2011 in concert with the Fund, and the efforts of the new government to reverse this have been obstructed by the Fund.


Rekson Silaban, Labour Institute


Many people are aware of the Asian crisis, and Indonesia was the worst-hit and the last to escape the crisis though the crisis started elsewhere in the region.


It appears the IMF has not adopted a different approach to tackling crisis; at the time Indonesia employed austerity and I recall the hateful situation at the time. The Fund at the time lost control and made very big mistakes in the country.


Austerity measures at the time included increasing bank rates to 70%. In the meantime, it also increased prices on a number of key commodities such as oil, electricity.


This led to catastrophic capital flight. The rupiah collapsed in value.


In the meantime the social safety net introduced by the Fund failed to support people, amidst a number of other strange activities, including forcing the Indonesian government to bail out private sector institutions, which led to huge corruption by false declarations of bankruptcy.


So, amidst austerity more than 100% of the value of the social safety net was committed to bailing out private enterprises. This led to food crisis, and social unrest and demonstrations. This led to the end of the Suharto period.


People still recall the IMF managing director standing over the dictator in his home while waiting for the agreement to be signed.


The IMF suggested that Indonesia should adopt a floating exchange rate, but after the sharp depreciation the government instead sought to mimic Malaysia’s policy of capital controls, or at least fix the value of the currency, but they were told that if that were to occur the money would be withheld, while liberalising the flow of foreign exchange.


This put Indonesia into a dilemma, which saw huge unemployment, bankruptcies and capital flight, and led to Indonesia being the hardest-hit in the crisis. This is now a memory, a social memory, to ensure that Indonesia would end IMF cooperation and with the World Bank, and the advocacy of civil society and trade unions is to ensure freedom from these IFIs.


This led to Indonesia speeding up its exit from the IMF. Indonesia has experience, and despite the financial crisis Indonesia ensured its economic growth. Third, the Indonesian state has now actually provided funds to the IMF, last year, $1 billion.


Mahmood Pradhan


Focus of remarks will mostly be on the Europe, though will be happy to discuss Indonesia case having worked on the program at the time.


Underlining the differences in our views, we nevertheless share many common objectives.


The work that the IMF has done has supported recommendations on quantitative easing, improving institutional democracy.


We do share the objective of taxing the financial sector, even if we think there are better ways of doing it than a financial transaction tax. We do believe the financial sector is under-taxed.

Our work on this question is very detailed and deep.


We fully support tackling tax evasion.


Hence the report’s arguments for alternatives are not something that we necessarily disagree with.


So, what has the IMF been doing and what has been our position?


AS the mission chief of the Euro area, we have argued consistently and at the forefront that fiscal tightening has been too tight. Moreover fiscal targets should not be driven by nominal targets, as they are vulnerable to factors which are external to governments’ policies.


In all the countries of Europe, where we have been advising, all of which are included in the Oxfam report, we have argued for a slower pace of adjustment.


This can be seen for example in France, which shows that where countries have fiscal space we have urged them to go slower. The report mentions Ireland, but this country’s growth prospects are deeply tied to the growth prospects of Europe.


The report discusses how best to protect the poor.


In Greece, a difficult example, most of the impact of unemployment has been in the private sector, not public sector, which reveals an unbalanced adjustment. The data regarding growth in pensions, far above European averages, including for example in Germany, those increases were not sustainable.


The reductions that have been put in place have focused on affecting higher income groups, and the analysis needs to look more deeply.


The reality is that in the areas where the Fund agrees with thte report, we have to face the constraint of affordability. Many countries in this crisis started with very high debt levels, and then suddenly faced exclusion from borrowing in markets. Incidentally, by way of an observation, when we discuss debt sustainability the case of Greece, which has yet to run a primary surplus, though hopefully soon will, then debt relief will not succeed.


In that situation, the official assistance from Europeans or the IMF, allows them to adjust fiscal expenditure with more time and more space, at far lower interest rates if market finance were available, which it’s not and in the case of Greece is unlikely to be available for some time.


These realities precede any discussion about whether the programme is doing the right thing.


Minimum wages are a difficult discussion. In Greece the minimum wages remain higher than the European average. It is incorrect to say that the adjustment has been totally one-sided.

Note that we do accept that tax evasion is very important.


Three issues are very difficult.


In the report there is a recommendation that where countries face extreme difficulties, debt restructuring should be considered. The report acknowledges that this occurred in Greece. This approach can only occur in highly exceptional circumstances.


The report mentions that Iceland could impose capital controls, which was not an option for many Euozone countires. We do not think that every program should be the same, or that one size fits all. We are working to discuss issues such as sovereignty, its necessary to remember that all the countries which are in the Eurozone wish to stay in the Eurozone. We work with their preference and thus constraint. Its’ not one imposed but a choice.


Two more issues.

The financial sector is under-taxed, and should be taxed; we disagree with the report and the EU where 11 countries have signed up to a transactions tax. We would prefer a tax on the profits of financial institutions and the remuneration of their employees, rather than every transaction, which they engage in.


This is an efficient mechanism, and we question the estimates of potential revenue, especially as the likely outcome is to drive business elsewhere.


Labour market issues are the most difficult. In the shared objective of more growth and reducing the unacceptably high unemployment, especially amongst the young, we have argued that hard reforms are needed. In Spain we have argued against the duality of insiders exacerbating unemployment, and have suggested increasing protections with tenure instead. In Greece we have seen a voucher system and shared employment schemes.

In many places, unit labour costs are too high (not just wages). The report argues not to reduce wages, though they’re market determined, and not do anything to reduce employment protection. Then there are other costs incurred to employ people.


Finally the suggestion of a 4.5 trillion euro bailout of the financial sector. The Irish case was particular, it did not have a choice but to provide a blanket guarantee.


There is now a lot of progress ot ensure that taxpayers are not solely required to bail out private sector lenders, and the sector contributes.


Much of the costs of this crisis to the public sector have not been direct costs, but rather lost revneues and indirect consequences of the nature of the crisis. It is a slow and difficult process, but that itself is a recognition of the need to provide a more gradual path of adjustment.


One small remark on Indonesia – the last point on Camdessus – the person who recommended a fixed exchange rate was Professor Hankey, but the issue was that a currency board requires reserves and a stable inflation rate, but those conditions did not prevail in Indonesia at the time. The IMF’s opposition was based on a belief that this board would not be sustainable, and the managaing director believed was that the money would be left with a liability for money that would fly immediately out of the country.