Jesper Jespersen

Reconciling environment and employment by switching from goods to services? A review of danish experience

Most European countries are characterized by high unemployment and developments in production and consumption that are not sustainable. The aim of this paper is to discuss whether it is possible at the same time to increase employment and reduce energy consumption and environmental degradation by switching production from goods to services and by promoting improvements in resource productivity and energy efficiency. These possibilities have been a focus of debate for some time, particularly in relation to the economic and environmental implications of the various policy options that might be adopted as a response to the prospect of climate change. To examine these possibilities this paper uses the input–output statistics of the Danish economy between 1966 and 1990 to demonstrate that on average the private service sector is not significantly more labour intensive and less energy intensive than the manufacturing sectors. For Denmark at least this finding contradicts the common claim that a switch away from manufacturing toward the service sector could allow a dematerialization of economic activity and an increase in eco-efficiency without increasing unemployment. The paper also demonstrates that in Denmark for the period from 1966 to 1990 increases in labour productivity have outpaced increases in energy productivity. This implies that increasing levels of energy consumption are needed to maintain levels of employment in the private sector. On the basis of this historical account it is concluded that employment and environment cannot be reconciled within the private sector through switching production from goods to services. Copyright

The Stability Pact: A Macroeconomic Straitjacket!

From the theory of Optimal Currency Areas (OCA) we know that the European Monetary Union (EMU) is certainly not an OCA. This observation implies that on the one hand the member countries will have a macroeconomic development that differs, but have, due to membership of the EMU, got much limited room for manoeuvre for pursuing an independent macroeconomic policy.

Keynes’s General Theory for Today

The themes of this important new volume were chosen to mark the 75th anniversary of the publication of The General Theory of Employment, Interest and Money. The distinguished authors concentrate on the relevance of this seminal publication for macroeconomic theory, method and the politics of today. This is particularly pertinent as similarities with the 1930s are striking in terms of unemployment, low growth, financial fragility and the European monetary union resembling the gold standard.

‘Optimal’ Currency Area: What Does It Mean?

The original theory of an ‘Optimal Currency Area’ was presented by Mundell (A theory of optimal currency areas. Am Econ Rev 51: 657–665, 1961). Conclusions were drawn using a neoclassical general equilibrium framework. This theory was employed when the Euro-monetarists, dominating the Delors-Commission (Report on economic and monetary union in the European community, Office for Official Publications of the EC, Luxemburg, 1989), recommended the establishment of a European Monetary Union, an independent European Central Bank, defined convergence criteria and the rules of public sector balanced budget. The theory has failed to foresee the current Euro crises. Alternatively, Euro-realistic theory, which takes analytical inspiration from Keynes’s macroeconomic methodology by using consistent stock-flow modelling, would have led to other and much less optimistic conclusions with regard to the outcome of imposing a common currency on the EU countries.

Macroeconomic Imbalances: Unemployment and Inequality

The macroeconomic development in the Eurozone (as a whole) and the major non-Euro countries has been significantly different since 2010. Unemployment in the Eurozone is still much higher than previously, but very unequally distributed. The Euro-realist explanation is lack of effective demand and huge balance-of-payments imbalances within the Eurozone. The Euro-monetarist have to the contrary recommended fiscal restrain and internal devaluations in deficit countries causing stagnating output, increased inequality and a falling wage rate, which tends to ‘beggar yourself and your neighbours’ by a kind of ‘race to bottom’. The non-Euro countries have fared somewhat better by taking stock on their monetary sovereignty through currency devaluations and more relaxed monetary and fiscal policies.

Why Was the EMU Established? Different Perspectives

The European Monetary Union suggested in the late 1980s was considered by the euro-monetarist as a political project to promote further economic integration and to prevent Germany from becoming the dominant European power after re-unification. The institutions surrounding the European Monetary Union were designed according to the Euro-monetarists’ theory of how to create an Optimal Currency Area (OCA) recommended by the Delors Commission (Report on economic and monetary union in the European community, Office for Official Publications of the EC, Luxemburg, 1989). Hence, politics overruled any realist objection by defining loose convergence criteria making too many countries eligible for the common currency and by disregarding balance-of-payments imbalances. Furthermore, the unilateral focus on the public sector deficit without viewing private sector imbalances underestimated the structural differences between the potential member states. Had a Euro-realist analytical framework been employed, a number of these macroeconomic imbalances would have been addressed at an earlier stage with less devastating consequences.

Any Future of the Euro

The EMU in its present form has come to a dead end. Stagnation, high unemployment and huge balance-of-payments surpluses cannot go on. Macroeconomic imbalances and popular discontent accumulate. If a future dissolution similar to the Gold Standard in the1930s should be avoided, a much needed Solidarity Fond has to be set-up. Countries with balance-of-payments surplus above 3 percent and foreign wealth beyond 60 percent of GDP should deposit the excess without interest. The revenue could be used to improve productivity in backward regions of deficit countries. In addition, public finances should no longer be a EU concern, but left to the national governments to decide upon. According to many Euro-realists, the EMU was – and still is – much too prematurely established. The Euro could be kept only as a parallel currency valued as a weighted average of all EU national currencies somewhat similar to the ECU, which worked quite well before the EMU was established.

Distressed European Central Bank and Financial Instability

Following the recommendation by Euro-monetarists, the European Central Bank’s major responsibility is to secure price stability in the Eurozone by inflation targeting. In reality, the European Central Bank (ECB) had little impact on developments in money supply (M3) and price inflation. Banks behaviour, financial markets and the euro exchange rate were dominated by market forces, which led to financial stress. When the financial crisis hit in 2008/2009 countries with balance-of-payments deficits and large foreign debt had increasing difficulties to get access to capital markets. First, EU set up rescue funds providing emergency loans, later the ECB started to act as lender of last resort. In both cases, debtor countries had to accept strict conditionalities, which prolonged the stagnation within the Eurozone as a whole.

Public Sector Deficit and Debt: Cause or Effect?

Euro-monetarists assume the private sector to be self-adjusting. Therefore, persistent macroeconomic imbalances have to be rooted in dis-equilibrating policies, which manifest themselves in public sector deficits. Euro-monetarists consider business cycles as short term and as minor deviations from the growth trend. The effect of automatic stabilisers should only be accepted within the 3 percent budget limit codified in the Stability Pact. In reality, the private sector is not self-adjusting. Excess savings have, especially after 2008, become common place in most Euro countries, causing the automatic budget deficit to increase far beyond 3 percent. In this way, austerity policy has in many countries increased unemployment without significantly reducing the public sector debt ratio. Fiscal policy is relevant to stabilise the economy considered as a whole.

Balance-of-Payments Imbalances have Become the ‘Achilles Heel’ of the EMU

A balance-of-payments deficit has to be financed abroad either by the private or by the public sector. This is independent of what currency is in use. If a deficit country is excluded from foreign capital markets, it goes bankrupt. A number of Eurozone countries were harshly reminded of this when the European capital markets froze in 2009/2010.