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Saturday, 31 January 2015

Is the European Union finally trying to make a real end to the embarrasing fiscal constructs, which rob countries from their desperately needed tax yields? New tax regulation offers a glimmer of hope.

A good friend of mine, Roustam Vakhitov, is a renowned lawyer and fiscal expert with respect to tax payments and tax regulation in the European Union. 

A few days ago, he sent me a paper, that contained his research with respect to the new corporate tax regulations, deployed by the European Union. These regulations will come into effect on 1 January 2016.

What these tax regulations should achieve, is the following:
  • Genuine, financial cross-border traffic between holdings, international head offices and executive subsidiaries in different countries, with the purpose of normal business execution and cash management, should remain possible at fair tax rates within the European Union, as such that companies will not get taxed twice or will get taxed with higher than necessary rates;
  • International fiscal constructions, however, which are solely deployed with the purpose of tax avoidance/evasion, should be made impossible. 

The following snippets come from the article of Roustam and his partner Dmitriy Mikhailenko. Some will be accompanied by my comments:

30 January 2015 Anti- offshore changes to the EU Directive on Parent and Subsidiary companies: what will change as of 2016

The  important changes to the Council Directive of the European Community "On the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States" (Council Directive 2011/96 / EU, hereinafter - the Directive).

In accordance with the Directive the subsidiaries are effectively exempt from withholding taxes on dividends and taxes on profit distributions in case of making payments to the parent companies. This option was misused sometimes to minimize taxation.

For example, a Russian or Ukrainian beneficiary may own an operating company in his jurisdiction through the Dutch, Latvian or Luxembourg holding company and an offshore company on top of it. In case of payment of dividends from Luxembourg / Latvia / the Netherlands directly to offshore, such dividends shall be subject to a withholding tax at the rate of 15%.

To reduce the tax burden, some consultants recommended to interpose over the Luxembourg, Dutch or Latvian company a Cyprus, Malta or another holding company in the country, in which the dividends are tax exempt if paid to the offshore.

In this case, dividends from Latvia, the Netherlands and Luxembourg to Cyprus would be tax exempt according to the rules of the Directive on parent and subsidiary companies, and from Cyprus such payments would be tax-exempt in accordance with the local legislation.

One could call these blatant fiscal constructs ‘tax porn’: the creation of artificial companies and holdings – mainly on paper – with the sole purpose of reducing tax payments, for executive companies and subsidiaries, virtually to nought.

Such fiscal constructs are very disruptive for all tax-receiving countries involved, as these constructs rob the countries from their desperately needed tax yields. 

Besides that, such fiscal constructs are also devastating for the unity and trust between countries in large multinational entities, like the European Union. The Netherlands, Ireland and Luxembourg are examples of such countries with "antisocial" tax laws, which could be used for tax avoidance (or evasion).

(Corporate) taxes by themselves are a drag, but they are used by governments to pay for unemployed people, healthcare and elderly care, roads, infrastructure and development, as well as many, many more purposes.

When large companies make use of such infrastructures and facilities in countries, but refuse to pay even the tiniest amount of money for it, it means that all tax payments in such countries should be coughed up by private citizens and small and medium enterprises.

Besides having to pay more than their fair share of taxes, these SME companies see their competitive powers dramatically decrease, in favour of the already powerful large companies with their tax advantages. 

These tax advantages for large companies make a level playing field in such countries impossible, as they act as EPO-dopage in the ‘Tour de France’ or steroids in baseball.

In order to prevent such practice, on January 27, 2015 the following changes to the Directive were adopted:
  • The above-mentioned tax benefits under the Directive shall not apply if the arrangement is recognized as not genuine;
  • The arrangement is presumed not to be genuine if its only purpose is to obtain tax benefits (i.e., there is no other economic feasibility of operations than obtaining tax benefits);
  •  Unreality of the arrangement is identified through a complex study of all the facts and circumstances of its functioning;
  • Not the whole arrangement may be admitted as not genuine, but only some of its elements (along with application of the negative effects exactly to such elements); 

In plain English, this means that companies may use foreign subsidiaries or holding companies to achieve a reduction of their corporate and withholding taxes, when these companies do a genuine share of the labour, services or production activities in their respective production or value chains.

However, when these holdings or subsidiaries are only created as an ‘administrative entity’, without a real function in the production or value chain, they might not be used anymore for tax avoidance (evasion).
  • The Member States may introduce more tough conditions related to payments between subsidiaries and parent companies in their national legislation compared to the Directive.
  • The EU Member States are obliged to implement the above changes in the Directive not later than 31.12.2015.         

This means that starting from 2016 the tax exemptions on dividends paid to Cyprus/Malta in the example above, or to any other similar jurisdiction shall not be granted if the Cyprus company does not perform the real activity and there is no economic justification of its presence in the arrangement.

The Directive did not forbid the countries to set their own measures to combat tax evasion. In the Netherlands such measures have started to be effectively applied since 2012, and an example of the arrangement 'the Netherlands-Cyprus' is a bit outdated, but now the European Commission obliged all the EU countries to amend their legislation providing for such measures of prevention of the tax evasion.

Several tendencies may be presumed as a result of the above changes.

Firstly, it is unlikely that the taxpayers will massively create genuine activities at every level of the multi-level holdings. Most likely, the structures will be simplified.

Secondly, the taxpayers will be more likely to choose as the main jurisdictions the countries in which there is no withholding tax on payments to non-residents (Cyprus, UK, Malta, Latvia etc.).

Considering the Russian law on CFCs, many Russian taxpayers will put up with the obligation to pay 15% tax, especially since it will be offset against the Russian personal income tax of 13%, and will remove the superstructures over Dutch and Luxembourg holding companies.

For the Ukrainian beneficiaries such dividends shall be subject to personal income tax at the rate of 20%, which also shall not exceed the rate of withholding tax under the payment from the Netherlands, and taking into account the tax paid in the course of the payment will not cause additional taxation in Ukraine.

Thirdly, some countries may abolish the withholding tax on dividends - Luxembourg already does not tax the dividends paid to residents of countries with which there is a tax treaty. It is possible that this tax will be eliminated entirely.

 It can also be assumed that if after the implementation of changes to the Directive the tax authorities of the EU determine that the European arrangements of the Ukrainian or Russian beneficiaries are artificial, the additional taxation is possible. In addition, the practice of obtaining preliminary tax rulings may tighten, and the risk of performing transactions without receiving them shall increase.

Summarized, it might be expected that the aforementioned measures will lead – one way or the other – to both a declining number of artificial fiscal constructs, higher tax yields for individual countries, as well as to a declining amount of money, withheld by companies, through tax avoidance or evasion. That is very good news in my humble opinion. 

Unfortunately, such measures cannot be introduced overnight. This means alas that these measures will only come in effect at January 1st of next year. Of course, that is much too late in the eyes of many people, including myself.

Thursday, 29 January 2015

Ernst's Economy at BNR Newsroom: About demotion and wage sacrifices, pt II. How we can make the labour market more flexible, without turning it into modern slavery with pittance rewards?!

This is the second part of my review of BNR Newsroom, the semi-live talk radio show of BNR News radio, hosted by Paul van Liempt. This week’s topic of demotion and (involuntary) wage sacrifices was quite personal for me, as I went through two involuntary wage sacrifices during the last two years.

The next person, to answer a question about the sense and nonsense of a wage sacrifice, was Mariëtte Patijn.

Mariëtte: When you (silently) agree with a involuntary wage sacrifice of 6%, deployed by your employer, and you get laid off anyway, you will end up receiving an unemployment benefit that is also 6% lower. This emphasizes the importance of the question, whether it makes sense or not to make the wage sacrifice: the company must stay in business and so must you.

Hans: The days of automatic salary increases are long gone. The question is what an organization can afford. Even civil servants do not receive their periodical wage increases anymore. Many civil servants are at the end of their wage development scale. Their only possibility for having a wage increase, is when a general raise of the wages occurs. This is the reason that labour unions mind the proposals of employers and try to make improved counter-offers.

Mariëtte Patijn of labour union FNV and Hans van der Spek
of Berenschot consultancy
Picture copyright of; Ernst Labruyère
Click to enlarge
Mariëtte: For people with a salary between €25,000 and €35,000, it is hard to develop an assessment system that can be connected to the wage development ladder. We – as union people – think that experience should be rewarded. That is the reason that we won’t simply let go of these periodical wage increases. These periodicals work fine at many positions. Traditionally the assessment systems have been aimed at a healthy career development of workers. That is so much more important than using wage increases as an incentive.

Klaas: When we don’t dare to take a chunk out of the €35,000+ salaries, we also should take care of the people below this threshold.

For civil servants with a considerable salary, the situation is that their appointment does not only offer them a fixed income, but also the certainty that they won’t be fired at will. That by itself is already a fringe benefit. Therefore it could be justifiable that civil servants, after reaching payment scale 10 or 11 [about the highest scales of the salary ladder – EL], start to make a reverse move on the salary ladder. In exchange for their fixed contract, their salary could be slowly diminished again.

You could also choose for making the salary more flexible: paying people more money during good economic times, while decreasing their wages again during bad times.

This might sound like a very sympathetic and smart idea, but it can be a very pro-cyclical development when in good times salaries are raised very quickly, while in bad times salaries start to drop. This can have a strong reinforcing effect on economic boom and bust periods.

Mariëtte: It is good to remember that civil servants are not only the highly paid staff members at cities and municipalities, but also garbage collectors, street-sweepers and upholders, who earn a lot less money. There is a huge problem within the domestic economy, which we still cannot get in motion. The purchase power stays at an anemic level and many houses and mortgages are still underwater.

Klaas: That is so true. To put it even stronger: at colleges and universities, the people at the secretariat are often the ones that will be dismissed in times of austerity, as the executives are afraid to take a chunk out of the teachers’ salaries. The people at the lower half of the salary ladder are often victims of the excellent legal positions of the top dogs; that is absolutely not necessary.

Steven: In the near future labour could fragmentize beyond our imagination. We call that Wiki-labour. We should not only aim at the fixed labour agreements with fixed periodicals anymore, as such rigid contracts can bring down companies. It is so much more important to facilitize labour at market prices, with a keen eye for personal development and education of workers.  

Currently, all kinds of income and saving sources for people are managed very rigidly: mortgages are fixed; pension money cannot be shifted towards mortgage payments. Banks cannot yet administer payment arrangements, with temporary postponements for certain obligations in case of money shortages.

I think that jobs should be in synch with the market: less wages in bad economic times and higher wages in good times. Banks now think in terms of debt and only want interest payments. Governments should be overhauled to be ready for the facilitation of wage shifts and the fragmentation of labour. To name an example: government burdens, which emerged as a consequence of operations to save banks, should not automatically be charged to the Dutch people through tax increases.

Ernst: Isn’t one of the unwanted side-effects of this wage and labour fragmentation that a lower class emerges, which also needs three jobs – for instance at Burger King or McDonalds –
in order to earn a decent income? Just like it happened in the United States? On top of that, this development of labour fragmentation and flexible wages could cause a very strong deflationary trend, as people and societies could end up being in a negative wage / price spiral.

Paul: Could for instance McDonalds not appear in the news soon, with a wage sacrifice for its employees?

Mariëtte: I was not informed about that, but it could be possible in the near future. Mentioning McDonalds, it is a habit there that people should be available for work at all times (about 60 hours per week), as they can be called for a work shift at very short notice. Be there or become jobless, is McDonalds’  message to their workers. That is why we call that ‘toss away-jobs’.

Steven Meester, Klaas Mulder, Mariëtte Patijn and Hans van der Spek
questioned by Paul van Liempt of BNR News radio
Picture copyright of; Ernst Labruyère
Click to enlarge

Due to this required availability, people are not even able to take multiple jobs, aka stack jobs. That is a big problem.

Paul: Did the picture that Ernst Labruyère sketched in his question offer a glimpse at the future?!

Klaas: It offered a glimpse of TODAY! In Amsterdam there are more youngsters with a part-time (service) job next to their education than there are unemployed people. Only youngsters are willing to take such jobs for only €5.70 per hour. Employers increasingly choose people below 27.

Paul: Will people earn their money with an official job, but also with some additional moonlighting?

Klaas: When there are more workers on offer than there is labour, the price for labour will drop inevitably. That is the simplest economic law. We must all come up with a cunning plan to reverse this trend.

Steven: Labour ‘glocalizes’: labour becomes more global, but also more local at the same time, as a consequence of the brainports that emerge everywhere. ASML, the famous Dutch producer of wafer printing machines for the microprocessor industry, does a fantastic job. It is a short-cyclical company; when times are rough, 40% of the engineers can be laid off nearly immediately, due to the nature of their contract, but they can also return immediately again when the market picks up.

When the volatility becomes more short-cyclical, you should be prepared to hire workers when the amount of work requires that and lay off those workers, when that is necessary. Or the workers could receive a lower salary during poor economic times.

Mariëtte: ASML is indeed an example of a company with excellent arrangements, but such arrangements are not in place everywhere. People have to work longer hours during good times, but in bad times they are simply asked to leave. Then they don’t receive wages at all.

We see things slide in the low-payment facilitary industries, like the home care industry. In earlier days, these people started with a fixed labour contract, but at a certain moment they were turned into freelancers. And now those people are often moonlighting for €10 per hour. This is currently a trend at the municipalities, with respect to home care, and this concerns definitely not a few people. The necessary austerity for homecare will be achieved this way, thus diminishing the problems of the current government, but it ruins normal jobs.

Steven: Please mind that a general trend, influenced through technology, is that companies shrink in size; for instance due to robotization, but also due to other causes. From a macro-economic point of view, there is an exhaust of labour. The question is, how can you facilitate that people take the direction of their own careers in their own hands. The fixed labour contract is not an answer, in situations that companies shrink in size.

Mariëtte: We have to think from the perspective of the employee. About 35% does not have a fixed contract anymore and these people notice on a daily basis how labour is organized. The choices of employers are only expense-based. Remuneration through alternative ways is much cheaper than the classic fixed labour contract.

Hans: It is paramount that employers and employees develop a different, more modern set of agreements, which offers more flexibility. They have to work together. The amount of working hours, but also the remuneration, should become more flexible. It is an illusion that after the crisis years, we can simply continue where we remained in 2007. A paradigm shift has taken place in the meantime.

Mariëtte: At the negotiating tables, we currently have to deal with about 20% of labour agreement deteriorations. That is not about getting or not getting periodicals; it is about abolishing 36 hour contracts in favour of 40 hour contracts. About 620,000 people are unemployed nowadays, but the people who have work do need to work longer hours. That’s ridiculous. Work should be redivided and better organized. That would be modernization.

Steven: Perhaps we should make it possible to exchange holidays and labour-reduction days (i.e. ATV-dag in Dutch) in favour of education budgets, so that people become more flexible.

Ernst: Is The Netherlands not aiming too much at dividing a smaller pie in the future, instead of making the pie bigger, where it concerns the economy and the labour market? Should we not put more effort in stimulating innovation and administering pinpointed subsidies for promising companies, structural research and innovative developments?

Steven Meester, Klaas Mulder, Mariëtte Patijn and Hans van der Spek
in discussion
Picture copyright of; Ernst Labruyère
Click to enlarge

Klaas: The very idea that we can make the pie so much bigger – through innovation – that the problems of 25 million European unemployeds can be solved, is an illusion. Keep on dreaming!

Mariëtte: Still, competing on price in The Netherlands is a dead end-road. We need to invest in innovation and we need to steer upon quality. We have never in history competed on price as a country. Never!

Steven: You can see all kinds of local initiatives: Brainport in Eindhoven; Food Valley in Nijmegen; Security Valley in The Hague. When we make labour more flexible and teach people how they can better sell themselves – for instance through e-portfolios – the dynamics of the Dutch labour market could definitely increase.

Hans: When there is innovation, a mismatch emerges between the people available for labour and the employees required by the companies. We should guide people from their current labour situation to their future situation, in order to fill up this void.

This was the end of a very interesting BNR Newsroom, in which hazards of the current labour market have been discussed and a glimpse was offered at the labour market of the future.

It is safe to conclude that involuntary wage sacrifices seldomly offer a steady solution for structural problems, when they are not accompanied by an improved company strategy and mission. We can also conclude that demotion is still a sensitive subject.

Perhaps the most important conclusion is that the labour market went through a paradigm shift during the last few years and emerging new problems require innovative and creative solutions..

Will be continued…

Ernst's Economy at BNR Newsroom: About demotion and wage sacrifices. The Dutch labour market in deflationary times

Last Monday I was present once again at BNR Newsroom, the semi-live business talk radio show of BNR Newsradio, hosted by the distinguised and savvy presenter Paul van Liempt.

The topics of this evening were:
  • the increasing occurrence of a phenomenon, called 'demotion': employees in the autumn of their career, who get or choose to take a job at a lower level, often (but not always) in combination with lower payments;
  • (involuntary) wage sacrifices for personnel as a means of last resort for companies in distress. 

These subjects were both very topical indeed.

Only one week ago, the story of the involuntary wage sacrifice of 5.8% for all personnel at the Dutch department store chain V&D had been prominently in the headlines of the Dutch newspapers. Many people do expect that more retail companies could run the gauntlet with this crude, but very effective method of saving personnel expenses.

And there has been the statement of Minister Stef Blok for Housing and State Service, that the possibility of demotion would be inserted in the collective labour agreements for civil servants, as far as he was concerned. This would mean that demotion could be a tangible prospect for civil servants, who are approaching the end of their civil career.

Monday’s broadcast of BNR Newsroom also had a personal meaning for me. During the last two years at my former employer (2013 – 2014), I went through an involuntary wage sacrifice twice. This meant that I, and all my colleagues at that company, lost 10% of my gross salary. Apart from the economic aspect, this is also a very intrusive measure from a personal point of view. People can’t help feeling under-appreciated and even betrayed by their executives after such an event.

And perhaps last, but not least: when the times are already very deflationary, like they are at this very moment, events like demotions and wage sacrifices reinforce these deflationary trends. People have less money to spend and also could lose a substantial part of their consumer confidence. Both have a negative impact on the local economy.

These were the main reasons that I wanted very much to be present at this BNR Newsroom discussion.

Paul van Liempt, the presenter of BNR Newsroom
Photograph copyright of: Ernst Labruyère
Click to enlarge
Fortunately, Paul van Liempt gave me the possibility to share my story with the Dutch listeners of Newsroom. I am very grateful for that.

There were four guests on the radio show:
  • Hans van der Spek: Consultant at Business Consultancy firm Berenschot and manager of the Dutch Knowledge Centre for Human Resource Management;
  • Mariëtte Patijn: Member of the executive board of labour union FNV and deputy council member in the Social Economic Council (SER);
  • Klaas Mulder: Philosopher, organisation consultant and writer of the book "Het Pakkenproletariaat" (i.e. "The Costume Proletariat"); 
  • Steven Meester: Vice President Resource Management at USG People 
After the introduction of the show (listen here for the semi-live broadcast), Paul started by asking Hans van der Spek, Senior Managing Consultation at consultancy firm Berenschot, about ‘demotion’ as a new tool in (collective) labour negotiations:

Hans:Half the companies either already has demotion as a policy or is thinking about introducing it. It is not new, but it gets definitely more attention currently. In contrary to the early days of demotion, it is slowly becoming a custom to reduce the salary and perks of the individual employee too.

Hans van der Spek, Managing consultant at Berenschot
Photograph copyright of: Ernst Labruyère
Click to enlarge
Mariëtte Patijn of labour union FNV was introduced by Paul with a question about the involuntary wage sacrifice at department store chain V&D:

Mariëtte: The V&D case was neither a demotion, nor a wage sacrifice. It was a unilateral reduction of wage money by the company management.

When there are solid arrangements, I am not adamantly against demotion as a tool. Sometimes it is possible to make collective agreements about accepting less favourable terms of labour. Adjustments to changing circumstances are sometimes necessary.

However, at companies where earlier official agreements were made about wage reductions for the personnel, like shipyard Verolme in the eighties, it didn’t help eventually. A wage sacrifice from the personnel does not offer a direct solution for rescuing the company. It is only ‘stay of execution’.

On top of that, it is a disastrous measure for low wage personnel; look for instance at the particular case at V&D. These people in average only earn €9 per hour; then a difference of €0,52 cents can be a big difference at the end of the year. Ergo: this measure can only be successful and ethical, when it is combined with a new corporate vision and strategy.

Steven Meester, Vice President Human Resources at USG People (temporary labour agency) is asked whether demotion is also applicable to management positions or not.

Steven: Demotion is definitely applicable to managers. Demotion and wage sacrifices are a trend, as a consequence of the current economic and demographical situation. The fierce economic crisis leads to substantial pressure on wages, while demotion is a consequence of the trend that people have to work more years until their retirement: until 67 years of age, instead of 65 or less, which we had earlier.

The labour market will consist of four generations soon. The question is how we can facilitate this development. That demotion is currently very problematic, is caused by the functional composition of the current labour market.

More professionally organized organisations are probably much better in handling demotion, as the division of labour is organized differently. For instance consultancy firms are much better in dividing the labour application than companies with a common functional structure, as assignments can be varied and guided better under the direction of the employee itself.

Klaas Mulder – philosopher and writer of the book The Costume Proletariat is asked about this particular book, in the context of demotion and wage diminishment.

Klaas: At this moment there is a whole middle class of workers, which can become unemployed overnight. The book is about changes that you see on the labour market.

We have been seeing wage sacrifices for a number of years now: at Cap Gemini, some people saw their wages diminished by 20%. Or look at consultancy bureau Atrivé – my former employer – where the ‘13th month’ bonus [a bonus for common personnel, consisting of one extra month’s payment, which was common practice in The Netherlands  - EL] was abolished.

And there were the freelance professionals, who saw their hourly fees diminish to €45 from €100 per hour. My own editor, for instance, received only €250 for editing a book of 250 pages: that is one euro per page for someone with 3 university grades, for crying out loud! If she would not have done it, somebody else would have. There are simply too much good people available, who don’t have a job right now.

Klaas Mulder, author of "Het Pakken Proletariaat"
Photograph copyright of: Ernst Labruyère
Click to enlarge
This has grave results for purchase power, as people simply see less money appearing on their wage slips. A positive result could be that this is good for our export position, but taking money away from people who earn only €9 per hour, is a very bad thing.

There it is again, the whole export thing! “Lower wages for more succesful exports” is the dominant mantra in The Netherlands and nobody cares if it kills the whole domestic consumption.

Klaas: We should abandon the concept that everybody needs to have a full working week of 40 hours.

Paul van Liempt: Wage sacrifices, like we saw at V&D; do these solve problems?

Steven: It depends from the business plan of V&D. It might work when a company spends too much money, in comparison with sales prices. Volkswagen had such a problem at the beginning of the 21st century. Its personnel made a voluntary(!) wage sacrifice of 10%, in order to keep all jobs, thus diminishing the expenses per car. Needless to say that it made Volkswagen very successful again.

Steven Meester, Vice-President of HRM at USG People
Photograph copyright of: Ernst Labruyère
Click to enlarge
With respect to V&D: only when you see the business plan of this company, you will know whether the wage sacrifice will work or not. There must be an enterprise plan in which one can see clearly, how the executives want to rescue the company. Otherwise, austerity on personnel wages is useless, as it simply postpones the problem.

Mariëtte: In case of a wage sacrifice with job guarantee, one must be convinced that the company will not default after all. Otherwise people will end up with less unemployment benefit money, due to their wage sacrifice. Intervening in this way, like what happened at V&D, is very old school, in the negative sense of the word.

Hans: The wage sacrifice was indeed deployed without further notice. What we now see more often, is that companies already try to answer the question, whether they can continue their business and level of expenses in a durable way, or that intervention – in cooperation with their employees – is necessary. However, this does not happen all the time yet. What happened at V&D was the most draconian format: an involuntary wage sacrifice.

However, you could also think about less intrusive possibilities. For instance, by not paying the periodical wage increases in one particular year. When you can explain your employees the big picture, you will usually get a whole different situation. We saw something like that at Het Dagblad van het Noorden [i.e. a daily newspaper for the Northern provinces – EL]. Employees did the math themselves and sacrificed a part of their wages, in favour of employees, who would otherwise have lost their jobs.

Mariëtte: Still, many people did not get a wage increase for a long time, as there is hardly any wage development currently. Many people can hardly make ends meet right now and for instance many houses and mortgages are under water. Besides that, there are a lot of people, who get their wages by the hour, instead of per month. Temporary workers; freelance professionals, payrollers etc.

Mariëtte Patijn, member of the executive board
of labour union FNV
Photograph copyright of: Ernst Labruyère
Click to enlarge
Many of these people can't buy at V&D anymore – or other shops, as a matter of fact – and this adds definitely pressure on the shop prices. When you compete with labour conditions, you will go down the drain. At this very moment, you see people earning €20,000 per year, who earned €35,000 per year only a few years ago.  

Then I had the opportunity to tell the story of my former employer, who deployed two involuntary wage sacrifices of 5% each, ’in order to save the company’:

Ernst: I worked as an ICT-consultant at a small company in the ICT industry. It was the quite familiar story of a shrinking market, vanishing customers and a company that failed to identify the desperate need for a strategy change.

As even a few lay off rounds, in which in total roughly 40% of personnel had been dismissed, did not turn the tides for the company, acute liquidity problems started to emerge.

This was the reason for a first involuntary wage sacrifice of 5% during July, 2013 and a second one in January, 2014.

Paul: When there are acute liquidity problems, you can do two things: pull the plug of the company or ask for a wage sacrifice. Was it accepted like that by the workers of this company?!

Ernst: The wage sacrifice was never really requested, but just deployed. I later heard that the management was afraid that a majority of the personnel would say ‘No’ to such a plan. That is at the very boundary between right and wrong.

Paul: And were there people who did not accept this and quitted the job?!

Ernst: Hardly. People simply just wanted to work. Most guys had an assignment at our external customers.

Paul: But what happened with your motivation?

The scene at BNR Newsroom
Photograph copyright of: Ernst Labruyère
Click to enlarge
Ernst: The motivation for our employer itself dropped, but nothing changed at our principals. Those people there remained our nearest and dearest colleagues. Therefore the motivation for working there remained high.

Paul: What does it say that people still go their work satisfiedly, even after a wage sacrifice?!

Steven: It has to do with the complexity of a function. For people with complex and interesting functions, the remuneration becomes less important as a satisfier. Especially having autonomy and being ‘boss of your own business’, as well as having control upon your own job, are the greatest drivers. Nevertheless, managers should look at the side-effects in individual cases: for instance, when someone’s mortgage and house are under water.

The executives of V&D have probably looked at the general wage level in the retail industry and came to the conclusion that people would earn less wages at their competition. This made an involuntary wage sacrifice a viable instrument for them. Individual employees then have the choice to resign and earn less money at V&D’s competition anyway, or swallow this lump and accept the wage sacrifice as the lesser of two evils.

Tomorrow I will continue with the second and last part of this article.

Tuesday, 27 January 2015

Greece made its vote for Syriza and the European Union has to respond to that: not fearmongering, but doing business must now be the message. This might be a big lump to swallow for the Northern European countries.

Last weekend was the long anticipated weekend of the Greek elections. As expected, the left-wing, populist party Syriza enjoyed a landslide victory, albeit a few seats short of an absolute majority in Greek parliament.

In arguably a world-record time, Syriza formed a coalition with ANEL (i.e. Independent Greeks), a new rightwing party with a similar populist economic agenda as Syriza, and only hours after that, Syriza’s leader Alexis Tsipras was sworn in as the next Prime Minister. 

With the same blistering speed Yanis Varoufakis – a seasoned, somewhat radical economist, blogger and lecturer with partial Australian roots – was chosen as the next finance minister of Greece. He will be sworn in likely this afternoon.

The European leaders  who had in advance of the elections done their share of warning and fearmongering against the consequences of a Syriza victory in Greece  licked their wounds. 

They are now in anticipation of fierce negotiations with the new Greek government, which made a commitment to the population that it will try to change the harsh conditions for remaining in the Euro and repaying their massive state debt. The Dutch finance minister Jeroen Dijsselbloem, who is chairman of the Euro-group, will meet his Greek counterpart Yanis Varoufakis this Friday, January 30 and the discussions between them might be tough.

Nevertheless, the financial markets, of which the response to the left wing victory in Greece was anticipated with broad concerns, reacted totally indifferent. It was as if the whole Syriza victory event in Greece was already priced in, which it probably was. Only one day after the elections, everything seemed business as usual.

The fact that the financial markets showed such a lukewarm response to the Syriza victory, seems a good omen that the Euro is definitely not at stake after the Greek elections. Just like in the years before these elections, it will now also be possible to do business with the Greek government; even if it is established on populist left wing and right wing parties like Syriza and ANEL.

Even for the Greek anti-Euro hawks a return to the Drachme should be ruled out as a no go-area, as such a transition does not make sense at all;  it is extremely expensive, very time-consuming and will yield a currency that will soon not be worth the paper it is printed on, while the debt remains quoted in Euro’s.

On top of that, as the editorial comment of Het Financieele Dagblad stated, the victory of Syriza might even offer possibilities:

The biggest concerns apply to the continuity of the economic policy. After five years of extremely painful economic restructurings and a decline of the Greek economy by 25%, the Greek economy returned to a growth path. However, the recovery is still cautious and vulnerable. That Syriza has the ambition to drastically change the direction of the restructuring policy makes sense, but seems not sensible. The Greek financial situation does not allow that, at least at the pace that Syriza desires. The treasury has not been replenished yet and the banks would come under fierce pressure, as worried citizens want to withdraw their savings’ money.

A Syriza government offers also possibilities. For the first time since the end of the Colonel’s regime in 1974 a party came into power, which does not belong to the corrupt political elite. And as necessary as it is to restructure the Greek economy, so necessary it is to radically change the all too familiar power structures. Too often the Justice department seems an extension of the people in power, only ten families dominate the whole economy, the media are not independent and the corruption did not diminish at all.

So there is definitely room for negotiations and improvements for both parties – Greece versus the Troika – as both parties have reasons for giving and taking some leeway to/from eachother.

Still, the first signals from the European Union – especially the Euro-Group – are not too encouraging. Remission of the vast Greek debt is not at all on the agenda and ‘debt hawk’ Jeroen Dijsselbloem and the Germans are probably not willing to soften the conditions for Greece one tiny bit.

Nevertheless, it is my opinion that the Troika (EU, IMF and ECB) must deploy some changes in their policy towards Greece. The Greek population has raised its voice against Europe, in a language that nobody could misunderstood.

The Greek middle and lower classes are sick and tired of the fact that their income has diminished with in average 25% during the crisis years and that many of them have been sentenced to a life in poverty, as a consequence of the European austerity measures. 

They are also sick and tired that the rich, corrupt elite did only get richer during this very crisis and that nothing whatsoever has been done, to capture the vast amounts of money, coming from tax evasion, corruption and fraud, as well as from other illegal activities.

These middle and lower classes in Greece want both a domestic government and an EU that care about their rights, needs and desires and that are not only there to protect ‘the rich and shameless’ in Greece. It is my strong opinion that the troika and the Euro-group must show that they mean business, as far as that is concerned.

No rigid focus on austerity and budget responsibility anymore, but a helping hand for the poor and unemployed Greeks, who are going through very rough times currently. Better economic circumstances, better export opportunities, innovation and job creation, as well as a battle against the widespread corruption in Greece, should be the homework for both Syriza and the EU. That could be a very big lump to swallow for the North-European representatives of the Euro-group, but it is nevertheless necessary.

How big this lump could actually be, became clear from a few leaked transcripts of former US Finance Minister Timothy Geithner, which have been printed in the Financial Times. These transcripts shed a revealing light on the outrage of North-European officials against Greece, at the beginning of the Euro-crisis in 2010:

The meeting was held in February 2010, just as panic over Greece’s restating of its accounts was beginning to grip the bond market. In his book, Geithner recalls there were calls for “Old Testament justice” at the meeting. But in the transcripts, he’s a bit more explicit:

Geithner: I remember coming to the dinner and I’m looking at my Blackberry. It was a fucking disaster in Europe. French bank stocks were down 7 or 8 per cent. That was a big deal. For me it was like, you know, you were having a classic complete carnage because of people [who] were saying: crisis in Greece, who’s exposed to Greece?….

I said at that dinner, that meeting, you know, because the Europeans came into that meeting basically saying: “We’re going to teach the Greeks a lesson. They are really terrible. They lied to us. They suck and they were profligate and took advantage of the whole basic thing and we’re going to crush them,” was their basic attitude, all of them….

They were lied to by the Greeks. It was embarrassing to them because the Greeks had ended up like borrowing all this money and they were mad and angry and hey were like: “Definitely get out the bats.” They just wanted to take a bat to them. But in taking a bat to them, they were feeding a fare that was in its early stages. There were a lot of dry tinders.

Right now, we are five years ahead in time since 2010 and the Greeks are still Europe’s biggest problem zone and a peril for the recovery of the Euro-zone as a whole. The tough and aggresive approach of the Troika towards Greece has caused a lot of pain and sorrow among the middle and lower classes in that country. And not only it has failed to solve the problems of Greece yet, but on a few occasions it even brought the Euro-zone at the brink of implosion.

I think it is time to indeed swallow this big lump, with respect to Greece, and start to do real business with this country again. 

How unlikely the current partners Syriza and ANEL may seem for the Euro-group and the Troika, they have a clean sheet with respect to political corruption and bear no political responsibility for the Greek behaviour during the years six years before the crisis started. 

And most important: they have a firm mandate from the Greek population. Now it is time to do business…