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Friday, 6 February 2015

Heavy disputes surrounding the rearrangements of the collective labour agreements in the Dutch construction industry could point at a long period of demure labour contracts: “be not too expensive or be out!”

The Netherlands has a long tradition of consultations and negotiations between employers, employees/labour unions and the government; the latter both as referee and as very large employer. 

This is the so-called ‘poldering process’: a process of cooperating instead of fighting for an optimal result.

The Dutch collective labour agreements or “CAO’s” are traditionally a mix between the employers' needs for moderate wage growth and flexibility of labour and the needs for good labour circumstances and a fair remuneration of the employees. 

This system has worked quite well for a long, long time. It yielded a steady, but moderate wage growth and a balanced set of fringe benefits during the last decades and kept the workers generally satisfied. This culminated in very few strikes and labour disruptions in The Netherlands, in comparison with other countries like for instance France.

One could, of course, justifiably argue that the times of moderate wage growth and wage restraint, as a consequence of the poldering process, have lasted too long in The Netherlands – which I did at many occasions

Especially during the credit crisis, this led to a dangerous loss of purchase power and a plummeting consumer confidence and thus to a near-collapse of the retail industry and many small and medium enterprises.

Nevertheless, the poldering process has turned The Netherlands into an extremely competitive, export-driven economy with almost no weak spots. Therefore both employers and employees want to keep this system afloat, under normal circumstances.

However, about one week ago, the Dutch magazine 'Cobouw’ published an alarming piece about the exhausting negotiations and failed attempts to come to new collective labour agreements (CAO's) in almost all areas of the construction industry. Here are the pertinent snips:

A CAO-chaos looms in the construction industry. Sixteen out of the seventeen most important CAO’s in the construction industry and adjacent industries still wait for an agreement between employers and employees. Besides the construction-CAO, this concerns the CAO’s for painters, building-finishers, the wood trading industry, carpenters, railroad infrastructure, thatcher's industry and the bricklayer's industry. These CAO’s all ended last year.

The CAO’s for small metal (installation industry), large metal and waterworks all mature this spring. The concrete mortar industry is already without a CAO for two years, as well as the building material wholesalers. Until now only one industry could reach an agreement: the 1500 labourers in the natural stone industry.

By itself it is not unusual that negotiations regarding a new CAO only start when the last one has matured. Nevertheless, the executive manager of labour union FNV Construction, Hans Crombeen, ascertains that a very large number of industries is without a CAO currently. According to him, this has to do with the exhausting discussions with respect to the restructuring of the construction-CAO, for which the negotiations will be resumed next Friday.

In the industries in which the negotiations already started, the differences between the propositions from either side are very big. The differences focus mostly on wages, working time reduction-furlough (i.e. ATV-dagen), older worker furlough and job flexibility. Employers find, on top of that, that the unions are not sufficiently accessible for CAO-restructuring plans. 

The unions, on their behalf, accuse employers of exclusively targeting at wage cost reduction. “You cannot ignore that it becomes increasingly hard to enter into a CAO”, according to Ronel Dielissen-Kleinjans, managing director of Mebin and involved in the CAO for concrete mortar producers. 

“What you see now, unfortunately, is that the unions raise their demands and go for an old-fashioned brawl with the employers. However, the building industry cannot cope with a raise in expenses yet. First, the margins ought to be raised”.

Mentally, I feel being stuck between a rock and hard place, when it comes to the collective labour agreements for the building industry.

The story of Ronel Dielissen-Kleinjans of Mebin, that the construction industry cannot cope with a brisk raise in expenses (see red and bold text), sounds definitely plausible.

After the building frenzy, which started in the middle of the nineties, came grindingly to a halt in the years after 2006/2007, there has been a generally malaise in the whole construction industry that has not been solved until this day.

The assignments regarding building projects for commercial real estate, residential real estate, roads and waterways, as well as infrastructural construction, mostly dried out. This was a consequence of the excess stock in vacant office buildings, the diminished demand for both owner-occupied dwellings and social housing, as well the ubiquitous austerity measures of the government, which caused an untimely end for many infrastructural building projects.

Even today, eight years after the building crisis started, we seem to be nowhere near an end to this crisis. The number of vacant commercial buildings is still very high and building cooperatives are yet very reluctant to restart social housing projects. Also many national infrastructure projects have been delayed or temporarily halted during the execution. Only for owner-occupied housing there seems to be a genuine recovery in the number of building projects.

Many of the large Dutch construction companies went through very rough times during the last six years and have used up a large share of their reserves, while trying to deal with the crisis and their diminishing order portfolio. Others did not even survive the crisis at all and defaulted earlier.

Therefore I presume that it is simply impossible yet for many of the still existing construction companies to pay higher wages and hourly fees to their workers.

On the other hand; many workers in the construction industry had to cope with very moderate wage growth (i.e. wage restraint) during the last six years: often well below the official inflation rate. That means that the purchase power of these workers has deteriorated over the years.

Other workers lost their steady jobs and were almost obliged to choose for an uncertain life as freelance professional in the construction industry. What made things even harder, is that these freelancers often had to deal with an influx of workers from the East-European low wage-countries, who started to work at much lower hourly rates. That put severe pressure on their own hourly rates, as these freelancers didn’t want to lose their assignments.

All these people - freelancers and the ones with steady jobs - do probably need a significant increase of their wages and hourly rates, in order to get their own finances back on track again, save some money for a rainy day and earn a little extra for consumption.

That is the reason that, with respect to the CAO’s, the labour unions currently play a high stakes poker game with the employers in the construction industry: they want better wages and better secondary arrangements and more job certainty for the workers with a fixed contract. 

The freelancers also want better hourly rates for themselves and especially a level playing field between them and the East-European workers.

Still, the unions and the freelancers have to find a cautious balance between what they want as remuneration and what the employers can afford to pay. In practice this will probably mean, that for the time being, the unions and freelancers have to leave most of their ambitions regarding wage increases and accept another few years of demure labour contracts. 

If they all not succeed in finding this important balance,  large parts of the construction industry will remain without a CAO. This could lead to further stagnation and frustration within this battered industry and that is not in the interest of anybody.

Wednesday, 4 February 2015

Research by the Dutch auditors and consultancy firm 'Deloitte' concludes that Dutch cities and municipalities have even more exposure to ground positions than anticipated earlier.

It is no secret that many Dutch cities and municipalities hold extensive ground positions, which had been collected in the "good ole' days" of the Dutch building frenzy, when the sky was still the limit for Dutch residential and commercial real estate. According to estimates, the total ground position of Dutch cities and municipalties is in the €10 billion range.  

It is also hardly a secret that these cities and municipalities suffered substantial losses (albeit yet mostly on paper) on their ground positions. These losses emerged, due to the dropping value and excess possession of building ground, as a consequence of the credit crisis and the considerable surplus of vacant (commercial) real estate, as this put an effective brake on building activities of cities and municipalities. 

An earlier report of Deloitte, published one year ago, spoke of paper losses of approximately €3.3 billion:

At the end of December 2013, the accountants organization Deloitte presented a research report to the Dutch government. The subject of this report: the depreciation of building ground, which is owned by the Dutch cities and municipalities.

The conclusion of this report: the depreciation on building ground for commercial and residential real estate (CRE/RRE), owned by the Dutch cities and communities, amounts to €3.3 billion in write-offs, until the year 2013.

In an Op-Ed concerning this Deloitte report, the retired professor Hugo Priemus of the Delft Institute of Technology (i.e. TU Delft) stated that this estimate of €3.3 was probably overly optimistic and that the losses could even be much larger:

For the situation until 2013, as described by Deloitte, the research study sketches a quite reliable picture, even though communities did not disclose everything. A substantial limitation of the study's value is the fact that private ground positions and “public/private partnership” relations have been left out of the equasion.

Practice learns that private parties in such a partnership are often able to transfer their financial risks to the municipalities, which (on their behalf) often didn’t reckon with the financial consequences of these risks.

In other words, according to professor Priemus, the amount of ground held in public/private partnerships could be a 'risk multiplier', for which the cities and municipalities carried the biggest amount of risk.

It seemed that Deloitte has taken this lesson from professor Priemus to heart. 
Today, about one year later, this auditors and consultancy firm published a new report with respect to such private / public partnerships, in which cities and municipalities are among the stakeholders. 

A special paragraph of this report was spent upon private/public partnerships for vacant building ground. Here I print the most important snippets of this report:

Corrected for double reporting, we can state that there have been 189 'spatial development projects with public/private cooperation' in 2013. In over 75% of the total 'public/private cooperation entities for spatial development', the executive format has been a corporation. About 20% was a common arrangement, general partnership or cooperation. In all these operational formats the risk for the municipality is higher than in case of a 'limited company'  (i.e. Ltd) or a ' public limited company' (i.e. plc), for which the liability is limited.

Based upon the available information, the average share of a city or municipality in such a 'public/private cooperation for spatial development' is approximately 50%. However, in many cases the current equity value of the projects at hand does not represent the deposited capital anymore. 

Besides that, the reported stake is not per definition equal to the percentage of the totally deposited capital. Next to their stake in shares, municipalities may have offered debt to the public/private organization in the form of loans and credit lines or they may have acted as warrants for a part of the acquired debt.

The average balance value per public/private cooperation for spatial development is €19 million. Based upon the aforementioned data, it is possible to estimate the total balance value of the active 'spatial development cooperations' to €3.6 billion (189 * €19 million), the total debt to €3.3 billion and the total equity to €285 million. This €3.6 billion comes on top of the current total exposure of €10.2 billion for municipal ground positions.

The risk, with respect to the balance value of these public/private cooperations for spatial development, will be shared between the shareholders. The average stake of the Dutch municipalities is approximately 50%. On top of that, there are the loans and guarantees that the municipalities supplied. Based upon these presumptions, it is conceivale that the direct exposure of municipalities to the 'spatial development cooperations'  ranges to €1.8 billion.

This additional risk does only exist at a limited number of municipalities: at 130 of the in total 408 municipalities. These (mostly larger) cities and municipalities host 44% of the total Dutch population and own 54% of the totally invested capital in self-managed ground positions (i.e. €5.4 billion).

One can conclude from these data, that the exposure to ground exploitation in such public/private cooperations is borne by municipalities, which also have a more substantial exposure to building ground, through self-managed ground positions. 

In other words: the risk of these participations lies with communities with an above average exposure to ground positions. The consequences could be that the public/private cooperations, partially owned by these municipalities, have to compete with the self-managed building grounds of the same municipalities, leading to serious conflicts of interests.

This example shows again what can happen, when cities and municipalities, with public tasks regarding housing and building activities, start to behave themselves as privately led corporations and start speculating with building ground for future commercial and residential real estate projects. Too often such partnerships lead to situations in which profits are privatized by the private partners, while losses are socialized by the public partners (i.e. borne by the municipalities themselves).

Another reason for concern could be, that this report is full of speculation and extrapolations, based upon the data that have been disclosed by the cities and municipalities themselves: the data that we know. 

Is it a strange idea that cities with much bigger stakes in such public/private cooperations - through loans and guarantees - and with a more risky exposure to (excess) ground positions are not very cooperative in disclosing such sensitive information? And could this not mean that the real situation could be even worse than already described in the report by Deloitte? 

The European Union: deflation seems to remain the name of the game in the coming months or years. The hyperinflationistas have been proven wrong with their fears.

For already a few years, the European Union has been the subject of a heated debate between economists and politicians. It concerned the question whether the EU was on the path towards deflation or elevated inflation.

The proponents of the latter theory – as always including the Germans, with their eternal fear for hyperinflation, as a painful heritage from the Weimar Republic during the interbellum – were afraid that the liquidity injections from Mario Draghi’s European Central Bank would eventually lead to strongly elevated inflation and perhaps even hyperinflation in the European Union. 

This was probably the main reason that Germany, and in its slipstream the whole Euro-zone, almost solely focused on austerity, budget balancing and debt slashing as the cure for the economic situation in Euro-zone countries. In the eyes of the political leaders and economic pundits, the EU had to improve the (Southern) European economies through the achievement of fiscally healthy government budgets and sound debt management. 

In the process, Germany tried to discourage or stop – one way or the other – every attempt of the Southern European countries and France and/or the ECB to increase the amount of liquidity in the European economies; irrespective if it would happen via Euro-bonds, Quantitative Easing, helicopter drops of money, low interest rates or lending facilities with very loose conditions. 

At occasions, when chancellor Angela Merkel seemed to give in too much to her European counterparts, the Bundesbank and the German Federal Constitutional Court in Karlsruhe acted as backstops: the latter, by openly investigating whether measures of the ECB and other European institutions would not violate the German constitution.

The result of this continued German policy was that very little happened in the Euro-zone besides the already worn out austerity policies, in spite of the fact that the southern European countries were sometimes litterally begging for looser monetary policies and alternative ways to acquire funds from the international capital markets (hence: the Euro-bonds). 

The results of this irrational German angst for loose monetary policies and hyperinflation are crystal clear: a seemingly unstoppable deflationary trend. 

All politicians and pundits, who think that this deflatory trend can be solely attributed to the recent dropping oil prices, should take a look at the following chart, based on the European Union inflation data of Euro-stat:

The inflationary trend data for the European Union from 2005-2015
Chart created by Ernst's Economy for You
Data courtesy of: Eurostat (
Click to enlarge
If this chart proves one thing beyond a reasonable doubt, it is that this deflationary trend already started to pick up steam in January 2012, when plummeting oil prices were still a thing of a distant future. 

And even more worrisome: no country – including the non-Euro countries – can escape from this deflatory trend, as ALL inflation trendlines point downwards at this very moment.

Perhaps even more disturbing is the fact that the wages and fees for lower and middle class jobs – which can be considered the lubricant of the economie  are more and more subject to wage restraint and even straight-forward wage reduction. This happens in The Netherlands and probably also in other European countries. 

Especially in the retail industry and among the small and medium enterprises there is absolutely no leeway for increased wages; too often wages must even be reduced, in order for companies to survive. This was proven by the V&D case two weeks ago. 

As both the retail industry and the small and medium enterprises - as big drivers for jobs in The Netherlands and abroad - are going through extremely rough times, there is a considerable chance that V&D will not remain the last large case of wage reduction in the coming months. 

Besides that, the unemployment and especially the youth unemployment in Europe remain at elevated levels (respectively 11.6% and 23% in average), with the countries in South-Europe as negative outliers. 

These are all strong deflatory factors:

  • When external causes for price increases are virtually absent, large quantities of unemployed and impoverished people keep retail prices low through a declined and structurally low demand;
  • Wage restraint and wage reduction make that people remain with the same or less purchase power than they had before. As people have to live within their means, this too will have a strong dampening effect on demand;
  • The higher taxes and levies, that were deployed almost everywhere, made that general purchase power for the largest groups in the European societies even further diminished;
  • The cautious growth everywhere in the international economies did probably the same for the energy prices; especially when the supply of oil and energy remained at elevated levels. 

Although it is safe to state that each country in Europe had its own special set of circumstances and actions, the point is that the deflationary trends are now visible everywhere. And it is not very likely that these trends will change soon.