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How to Bully a Country into Bankruptcy

Politics / Global Debt Crisis Nov 03, 2010 - 11:49 AM GMT



Best Financial Markets Analysis ArticleCristian Gherasim writes: We are all familiar with the power gained by trade unions in present-day Europe. Lately, it seems that they have also gained the privilege to turn to violence each time their demands aren't met. It's safe to say that a union's decision has become as important as a governmental decree.

Trade unions set wages, working time, retirement age, and social benefits; then they oversee and enforce them by going on strike each time the government is unwilling to succumb to their demands. God forbid someone anger the hyperactive trade unions. They will use force, seize the economy, and fervently hunt down anyone who dares to think that each worker is responsible to consumers and not to union leaders.

More than most, French workers have always been at odds with capitalist morality. Recently, we have seen how a country can be run — or run into the ground — by trade unions. In reaction to President Sarkozy's proposed pension reforms, French workers have gone on strike and paralyzed the nation.

Not only did they stop working but they also turned to paramilitary tactics. They seized refineries and fuel depots; they closed fuel pipelines going to Charles de Gaulle and Orly airports, and massively disrupted rail travel. The fuel shortages have crippled the economy. Strikers stopped work at two of France's three liquefied-natural-gas terminals. All 12 French refineries have gone on strike. The country has also started to import electricity as the wave of protest action took hold of energy supplies. Students have taken to the streets, and the police used water cannons and tear gas to disperse protesters in cities like Paris, Marseille, Toulouse, and Bordeaux.

On the other side of the English Channel, Britain's government unveiled plans to slash public spending, eliminate nearly half-a-million jobs, and raise the retirement age from 65 to 66. But the British largely resisted the urge to follow the lead of their French neighbors and flood the streets in angry and sporadically violent protest.

Why is there such a stark contrast between the reactions of French and British citizens to this week's parallel announcements of so-called austerity measures? Some would say that it is a question of national peculiarity and that some nations are more inclined than others to social unrest. This may be one of the reasons, but I believe that things are much simpler than that. It is less an aspect of crowd psychology than a consequence of a lesson learned through economic history.

As Ludwig von Mises tells us, the British have already experienced how trade unions and Keynesian policies can utterly destroy a nation's economy. After World War I, Great Britain returned to the prewar pound-to-gold parity. This caused an overevaluation of the British pound and the purchasing power of every employee increased significantly. In a free-market system, the nominal wage would have gone down in order to counterbalance this phenomenon, without the real wage being altered. But that didn't happen. Why? Because trade unions opposed any wage adjustment to match the new purchasing power of the British pound; real wages continued to rise due to this monetary measure. A full or near-full economic catastrophe followed.

The predominantly industrialized England, which relied heavily on exports, found itself unable to pay for raw materials as the British pound — and with it British goods — increased in value and became more expensive on the world's markets. Exports declined and so did England's economic might. Because wages were artificially forced over the level that would have enabled the full use of the workforce potential, factories and whole industries had to close down, with millions of workers losing their jobs.

Unemployment lasted for years, production reached an all-time low, and the United Kingdom went into recession. The government had to act and they did so by devaluing the pound. But the trade unions caught on to this monetary stunt and demanded that wages be indexed in line with the rising prices, which in turn generated inflation.

"The British have already experienced how trade unions and Keynesian policies can utterly destroy a nation's economy."

Keynes was quite aware of the fact that trade-union-imposed wages generated skyrocketing unemployment. Still, he claimed that workers, despite currency devaluation, can be tricked into thinking that their wages remain unaltered if they keep on receiving the same sum of money. He foolishly thought that full employment could be reached by inflation and not by having a free labor market unhindered by trade unions and government.

The only way of attaining full employment is by having a free labor market. Only it can determine the real cost of labor. Wages can only fluctuate in line with workforce demand. But because there's a group of people who think that full unemployment is unattainable without inflation, labor markets continue to be under the control of governments and wage levels are the outcome of trade-union pressure and violence.

So, the British are content with the announced cuts because they are aware that a deficit-run budget can send them back to the 1929–1933 economic meltdown. They are aware that the infamous European social model is no longer sustainable. It can no longer cope with deficit spending, high labor cost, and state-provided benefits. An aging population and the lack of economic competitiveness weakens Europe's ability to maintain the high living standards that most western Europeans have enjoyed during the last decades.

The French, like other welfare-state beneficiaries, have to come to terms with the end of their art de vivre. From now on they have to work longer, harder, better, and understand that free markets and not trade unions should act as censors. They have to give up the idea that work benefits are collective rights. Work and the search for work benefits are solitary activities upheld by personal skills that only a free market can properly evaluate and repay.

In fact, work has value only within a free-market system. Only in this way can every worker's effort be correctly assessed and remunerated properly. Otherwise it's all a waste of time and energy. This worker-consumer relationship is mediated through the use of money. And the salary, far from being a gift from government and trade unions, is the materialization of the consumers' satisfaction.

There's a lot of hypocrisy in this kind of social movement and national strikes. For workers and trade unions the principles of the free market and capitalism are falling on deaf ears. They want more money for less work, the same benefits even though they are no longer competitive and their manufactured goods no longer sell. As it often happens, their work is unproductive and they end up being heavily subsidized. These absurd antieconomic behaviors are a waste of public money and only stress the need for developing appropriate free-market mechanisms.

Driven by their socialist beliefs, the present-day trade unions act against laissez-faire and the tradition of economic liberalism, discouraging Europe's workforce and generating economic stagnation. This crippling system of social benefits and the trade unions' guerrilla-warfare method of getting their own way have to stop. If they don't, Europe will lag ever further behind and its current relative impoverishment will soon turn into absolute pauperization, ultimately resulting not only in economic but also in cultural and moral decline.

Cristian Gherasim is currently working on a master’s degree in Romanian and European politics at the University of Bucharest. Send him mail. See Cristian Gherasim's article archives.

© 2010 Copyright Cristian Gherasim - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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