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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. 

Monday, 2 February 2015

Mario Draghi's quantitative easing program ‘Euro-style’ is nothing more than a complaint against the European politicians for kicking the can down the road. Unfortunately, its effects for the real economy will be close to nought

It was the talk of the town last month: the (presumed) start of a large Quantitative Easing program in Europe.

The question was not so much whether chairman Mario Draghi of the European Central Bank would indeed start such a QE program. It was rather how large it would be and if it would make a lasting impression on the financial markets after all, although the markets already had priced such a seemingly inevitable event.

Well, Supermario did not disappoint and pulled a bazooka of epic proportions from his sleeve: a sovereign and bank bond purchase program, sized at a staggering amount of €60 billion per month and with a forecasted maximum size of €1260 billion. That is, when the program will end as scheduled in September, 2016.

On top of that, the program would become open-ended, when its goals would not have been fulfilled at the planned maturity date in September next year.

Northern Europe was flabbergasted, to put it mildly.

President of De Nederlandsche Bank (DNB) Klaas Knot and Bundesbank-president Jens Weidmann immediately ran forward to the microphone, in order to create their own Shaggy moment by openly stating in the press: “It wasn’t me! I have voted against this!”

Many Northern European politicians – especially the ones from ‘the usual suspects’ Germany, The Netherlands and Finland – almost choked in their coffee and tea, after they heard the news. They were immediately ready to give their opinions about this scandalous QE program:

"The European QE program is a disgrace for the hardworking Northern Europeans. The European Central Bank is squandering our hard-earnt money upon the Southern European countries and France, as these countries are not able to balance their budgets and structurally reform their backwarded economies.

And now the Northern European countries must suffer for the mistakes and stupidity of these Southern European countries." 

Well, you get the picture...

The painful conclusion is, unfortunately, that it would be much more quiet when people and media would enquire thorougly, exactly WHICH measures these northern Euro-zone politicians took THEMSELVES, in order to fight the crisis in the Euro-zone: not only during the past months, but even during the past five years. 

That is the underlying problem and perhaps the real reason for the deployment of QE1 in the Euro-zone: politicians sitting on their hands, while frantically defending the current, non-effective policy. Much more than forcing additional austerity measures upon Southern Europe, while propagating balance and debt stability in the spirit of the Stability and Growth pact, has not been done.

Yes, there are some cautious signals of slowly returning growth in Spain and even the situation in Greece has become a little bit better, when you just look at the sheer economic data alone.

Food banks are now crowded with people, who were normal middle-class citizens in earlier years and some areas in Athens show the signs of genuine poverty and despair. The worst thing is: Greece is not a country in the Third World, but in arguably the strongest and largest economic block in the world.

Instead of being just a (poorly effective) means for improving the economies in the Southern European countries, the concepts austerity, budget balancing, debt slashing and structural reforms have seemingly turned into the main purpose of the Euro-zone approach towards the economy. Not only in the southern countries (aka the PIIGS), but also in France and the northern countries, who have their own issues with their anemic economies.

If austerity, debt slashing and structural reforms did not help the economies in the Euro-zone yet, it was because there had not been enough austerity, debt slashing and structural reforms, in the eyes of the Euro-zone politicians and pundits. Consequently, it was time to double the efforts!

And that the consumers already raised the white flag in many Euro-zone countries? 

“Well, who cares?! We know we do the right thing there. Austerity, debt-slashing and structural reforms are the only medicine that really works eventually. Angela Merkel told us and she is always right. On top of that, she has the most money and influence in the Euro-zone, hasn’t she?!”

This stubborn denial of both the grim consequences of the blatantly failed austerity policy for the population in the Euro-zone countries and the emerged reality in especially the southern (and northern (!)) Euro-zone countries, is archetypal for the ‘governmental autism’ of the Euro-zone leaders. 

In my opinion, this governmental autism is one of the main drivers for the rise of the populist right-wing and left-wing parties all over Europe. The 'leading' European politicians structurally do not understand a large part of their grassroots anymore. The technocratic and mechanical leadership of the Euro-zone lost touch with their population, as they forgot to supply their citizens with a little hope and tangible prospects upon a better future. 

The simple point is that the European politicians have let their common citizens down. And they have especially let their youth down: the embarrasing youth unemployment rate of 23% in the whole Euro-zone (December 2014) and the fact that it changed by less than 1% during the whole of 2014, proves this beyond a reasonable doubt. 

Spain, Greece, Italy and Croatia with their youth unemployment rates of well over 40% are burning accusations of this governmental autism of the European leaders.

No decisive programs have been started against unemployment and against youth unemployment. Besides that, there has never been a majority within the European Council (read: a majority having a German approval), in favour of measures that will really get the European economies in motion. 

And nowhere the effects of these missing turn-around policies were more devastating than in the southern European countries, where all democracies have a relatively recent past of dictatorship and still endure large societal and political problems as a consequence of their past.

Instead of being given a little bit of hope and prospects by the Euro-zone and the European Union, the common citizens of Greece, Spain, Portugal and Italy have been received with feelings of scorn and disdain from the northern European countries. 

One cannot read one single article about Greece and (also) Italy or the words corruption, tax evasion, embezzlement and clientelism have been etched upon his retina. Especially the people, politicians and pundits in The Netherlands and Germany all know it all too well:

The Greeks and Italians are corrupted scoundrels, their economy is a fleabag and pumping additional money in it, is just as bad as directly throwing it into the fire. Their only option should be to return to the Drachme, while devaluating this currency into oblivion. They should have never been accepted by the Euro-zone in the first place”.

The stubborn attitude of especially Germany, with respect to their refusal to loosen the bridles for the Southern European countries, can – in my humble opinion – be held directly responsible for the extremely sluggish recovery of the European Economy and the substantial societal unrest in many countries, leading to the ubiquitous rise of the populist parties.

It seemed that only one person could do something really dramatic for the European economy, without being interfered by the German political leadership, and thus send a powerful signal to the European Council. 

And so Mario did what  - in his eyes - he had to do: he pulled his bazooka and started the European Quantitative Easing program; probably not because he really thought it would help the European economies, but in order to provoke the European politicians into action themselves.

In an excellent Op-Ed, former CFO Jan van Rutte of the Dutch nationalized bank ABN Amro touched a raw nerve, when he spoke about the sense and nonsense of Quantitative Easing.

With increasing astonishment I followed the recent developments, concerning the ECB measure to buy sovereign and corporate bonds on a large scale: quantitative easing. My astonishment not only applies to the measure itself, but also to the circumstance that the involved advisors and presidents of the national central banks could not block it apparently. 

The measure is aimed at bringing more liquidity into the European economic circulation, spurring inflation, increasing consumer confidence and enhance investments. However, the decision does not solve the core problem. 

The banks in Europe have commonly ample liquidity at their disposal, at this moment. This is especially true in case of the Dutch banks. On top of that, the pension funds and insurers have much liquidity at hand for investments.

Yet, financial institutions are often reluctant with their credit supply, mostly because the outlook for their customers, who are requiring credit, is quite poor. This outlook, and consequently the effective demand, will only improve, when consumer spending increases.

This will not happen by pumping more liquidity into the system, but through enhancing purchase power; for instance through tax measures and by creating room for wage increases. Or by diminishing the unemployment, for instance through infrstructural projects financed by the government and the financial industry. 

Consumers will also dare to invest more, when the uncertainty about new austerity measures diminishes or – in case of The Netherlands – the uncertainty about further declines within the Mortgage Interest Deductability. Obviously, the current problems are playing at the demand side of the economy; not at the supply side as a consequence of missing liquidity.

Of course, Jan van Rutte is absolutely right with the conclusions of his Op-Ed. 

Sponsoring the supply-side, through Quantitative Easing, will not do anything about the obvious problems at the demand side of the economy. Van Rutte points that out very clearly in the red and bold texts of his article. However, that is the very part of the economy for which the European politicians and official are responsible. It lies beyond the grasp of the European Central Bank

Unfortunately, the intrinsical nature of a Quantitative Easing program - buying sovereign bonds and bank bonds from the individual countries with "printed" money from the European Central bank - is not suitable for helping the real economies of Europe into action; hence, the demand side.

The money flow pours into the large European banks and the state budgets of the individual countries, but there the flow will stop abruptly, as Van Rutte already pointed out. 

Countries - especially the ones where the money is needed most by their citizens - will not decrease their direct and indirect taxes, due to the mandatory austerity, budget balancing and debt slashing, as a consequence of the rules in the Stability and Growth Pact and the German emphasis on structural reforms.

The banks will also not lend more money to private citizens and small and medium enterprises, because of the QE money, as the financial and economic circumstances among their borrowers did not change at all. Even when the money is virtually free, banks still hate to lose it upon bad debtors.

Only very large companies and other very large, creditworthy investors will be able to profit from QE, but these parties already had ample investment funds and cash at their disposal, due to the strongly elevated stock rates and the nearly free lending money at the banks. In other words: these parties never experienced liquidity problems in the first place.

And so the situation works out that people and institutions that don't really need money, will receive it in enormous quantities. The private citizens and small companies in Europe on the other hand, that really need to have more disposable money and/or business opportunities - either through stimulation of innovation, infrastructural maintenance and the creation of jobs or through higher disposable income, less taxes and more avalaible loans for the smallest companies - will get none. 

That is the perverse reality of quantitative easing. 

Yet, I had the feeling that Draghi could not act differently, as he probably had to send a powerful signal to the European Council and the European Commission that something had to be done. 

And now that he has done it, I hope it will work as a powerful wake-up call for the European politicians and officials. Still, I am not very optimistic about it.