Introduction:

The Euro system is in crisis. But even before the crisis the performance of the Euro area was disappointing, in particular for workers. Unemployment remained high in many countries and there had been a sharp decline in the wage share since the early 1980s. The austerity packages and the conditionality attached to the bailout packages deepen this trend further; they notably include a reduction in minimum wages (in the case of Ireland) and a weakening of collective bargaining (in the case of Greece). These measures are part of the dominant liberal theory of wages that regards labour market flexibility as a precondition for economic stability and prosperity. For many years the reduction of the wage share had been an implicit policy goal of the European Commission (EC). The Broad Economic Policy Guidelines included a passage stating that "real wage developments should be below the increase in productivity" (EC 1997, 14). In reaction to the crisis wage suppression is advocated under the heading of 'internal devaluation'. The EU's economic policy package that has pursued labour market flexibility has been unable to prevent the build up of the disequilibria that have erupted in the present crisis. It has delivered three decades of declining wage shares without generating sustainable growth for the Euro area. Rather than more of the same medicine, we argue that the Euro area needs a fundamental rethinking of its economic policy. This chapter discusses wage policy and advocates a system of European wage bargaining coordination that should aim at wages growing at least with productivity growth and the inflation target in the long term. In the medium term it would have to ensure that German wages grow substantially faster than those of Greece, Ireland, Portugal and Spain.

In the 1930s Keynes argued that wage flexibility would not only be insufficient to generate full employment, it could generate economic instability. At the core of his argument was the insight that wages are a source of economic demand. The positive effects of a wage cut on employment at a firm level do not add up at the macro level; a wage cut will typically reduce aggregate demand because of declines in consumption by workers. Moreover, nominal wage cuts would also lead to price deflation which increases the real value of debt and, under the conditions of a debt overhang as it is the case now, may destabilize the economy.

The contribution of this chapter lies in its exposition and tying together of some established arguments, which have been made by, among others, Arestis et al. (2001), Bibow (2007), Hein and Truger (2005), Huffschmid (2005), EuroMemo Group (2010), Flassbeck and Spiecker (2005), Onaran (2011) and Stockhammer (2011a). The present chapter builds on these Keynesian insights and argues, firstly, that the aggregate demand regime in the Euro area is wage-led based on the econometric estimations of post-Kaleckian models in the literature. Secondly, we argue that in the Euro area two growth models – a credit-led and an export-led model – have emerged, and have given rise to the imbalances that are at the heart of the euro crisis. Wage flexibility has proven insufficient to prevent these imbalances. Finally, we present a system of coordinated wage bargaining that aims at wages rising in line with productivity growth and (a substantially upward-revised) inflation target.

The chapter is structured as follows. Section 2 establishes some stylized facts regarding income distribution, growth and current account positions in the Euro area, and summarizes the literature on the nature of the demand regime in Europe. Section 3 presents evidence for the emergence of exportled and of credit-led growth models. Section 4 outlines a proposal for wage bargaining and section 5 concludes.