What changes?
By 2003 the effective rate of protection in manufacturing had fallen from 35% in the 1970s to 5%. Foreign banks have been allowed to compete. Airlines, shipping and telecoms have been deregulated. The labour market has been moved from a political wage fixing mechanism to economic rationalism reached through bargaining. Taxes have been overhauled, reducing both company and personal income taxes, and introducing capital gains tax and the GST, taxes that did not inhibit productivity.
Do you want a falafel with that?
Immigration policies have also been overhauled. In the 1940s Australia was about 98% Anglo-Celtic, largely locally born. Now more than 25% of the population has been born outside of Australia, coming from over 120 different countries. European countries appear to be torn and challenged by demographic movements. Countries such as Belgium, France, Netherlands and UK struggle to deal with an immigrant population of around about 10%. Resentment, racism and riots proliferate. In comparison Australia has had a relatively peaceful ethnic cohabitation, if not mixing.
Challenges
High level immigration has fuelled the economy and now contributes in excess of 350,000 people every year to the population. This figure is the net gain of people coming into Australia every year to work and live, over those who leave. For these people, no matter how long they stay, infrastructure has to be provided for them and those who will succeed them.
Infrastructure requires investment. Growth requires productivity.
Now the bad news!
The US is looking to low growth – 1.6% in 2012 and increasing unemployment at 10%. Unless there is change these figures cannot augur well for Obama’s re-election in November, and when you look to the economic policies of his opponents ….
No cheer for Barack
Why Occupy Wall Street?
The US economic downturn has made the increasing inequalities of wealth distribution more apparent.
Between 1947 and 1979 productivity in the US rose by 119%, while the income of the bottom fifth of the population rose by 122%. But from 1979 to 2009, productivity rose by 80%, while the income of the bottom fifth fell by 4%. Over the same period the income of the top 1% rose by 270%!
Waffles for Brussels
The situation in the Eurozone countries continues to deteriorate.
Endless meetings and plans are being overtaken by events, making them superfluous and irrelevant even before they see the light of day as plans, let alone can be implemented. Now there is to be a treaty with new economic rigour, bringing in all the EU, except UK.
If PIIGS could fly
Although the problem begins with the Eurozone countries – those 17 of the 27 members of the European Union (EU) who share the euro and specifically with the weak peripheral countries of the Eurozone - Portugal, Ireland and Greece (PIG), it has now threatened bigger economies - Italy and Spain (now the PIIGS).
The initial response to the PIG problem was to impose severe austerity measures and bolster up short term liquidity problems by making funds available through the IMF, the European Central Bank (ECB), and individual member states.
The problem now is that Italy is too big to be dealt with by simple austerity measures and funds along the lines of those created to deliver to the PIG economies, and if Spain is added to the equation – whoo!
You are what you sell – No, you are what you say you sell
The revamped Trade Practices Act and state legislation in the area of consumer protection, through the unified new Australian Consumer Law impose responsibilities on those in the market, and introduce fines for non-compliance ranging from $66,000 to $1.5 million.
Two headed donkey
France and Germany, as the principal Eurozone countries, have been meeting, talking, meeting and talking, and meeting and talking. France believes in funding, freeing up the ECB so it can act like the Reserve Bank of Australia and other central banks as a lender of last resort. France also pushes the concept of Eurobonds – bonds backed by the strong economies of the Eurozone and the ECB, so as to get lower interest rates for loans to the PIIGS. Germany says –nein! and insists on austerity and financial rectitude.
Tough love
It looks like the Germans have won. The resolution is a treaty in March 2012 obliging member states to keep their budget deficits to 3% (Australia’s is at 3.6%) and reduction of debt to GDP ratio of 60%, as well as allowing for EU supervision of fiscal policies of members. This is ambitious, given that by 2010 debt to GDP ratios of France and Germany each exceeded 80%, Italy hit 119% and Greece 143% (Australia’s is just under 27%).
Will the patients survive?
In the meantime governments will have to apply austerity measures, cut costs and banks that lent to Greece are taking 50% haircuts.
This is drastic surgery and the question will be whether the patients will survive the surgery. The PIIGS and other European countries are looking at 6 + years of austerity and minimal (if any), and for some, negative growth – a hard sell to the people who demonstrate and vote.
Planning for the future without dealing with the present
In the new plan no one has explained where the growth is gong to come from. Austerity without growth makes the present situation worse, so as to make the future unrealisable.
Can we contain the problem to Europe?
The largest lenders to Greece were French banks. Attacks on the solvency of French banks end up as an attack on the credibility of French sovereign risk, currently AAA. This lack of confidence goes on to become a self-fulfilling prophecy.
French banks are exposed to other banks, particularly US and British banks, so that the contagion will be sure to continue. Australian banks borrow their funds from these foreign banks.
Banks are there to help
Australia’s Reserve Bank cut interest rates in an attempt to insulate Australia from European woes and liquidity problems, and stimulate confidence and credit. The Australian banks are signaling that they will not feel obliged to follow the Reserve Bank's lead – reducing the Reserve Bank’s ability to influence the Australian economy.
Haircuts and close shaves
Banks taking haircuts, and others exposed to those banks, have to shore up their capital. The only way to do this is to bring in and hold more funds and lend less. This, in turn brings about liquidity problems. Businesses, who would ordinarily have no problem in raising funds, now have problems because the usual lenders are not lending. This looks like a repeat of the GFC of 2008 and risks being even worse.
Can PIIGS be shored up on BRICs?
The emerging economies have been nicknamed BRIC – Brazil, Russia, India and China.
The French are turning to emerging countries, particularly China, to help in the Eurozone bailout. France has an annual per capita income of $40,000, while China’s is at $4,000, but China has reserves of more than $3 trillion, while already holding $1 trillion in US debt.
Although Europe accounts for more than 25% of Chinese exports, China has politely turned down the French offer, preferring possibly to pass through the IMF than directly fund Europe.
Interestingly, as forecast Chinese GDP growth has been downgraded from 10% p.a. to 8.4%, China has eased credit controls for its banks, looking to increase local consumption as insurance against fall off in exports.
No worries mate?
Impact on Australia of the Eurozone crisis ranges from immediate to long term.
Firstly, stock markets around the world have taken a hammering through lack of confidence. The average Australian's superannuation, based on shares, has taken a plunge.
Secondly, reticence of lenders worldwide will deprive Australian lenders of access to funds, tightening up credit.
Thirdly, loss of markets to China slows down production in China, and reduces demand for Australian raw materials.
Finally, many Europeans looking at 6 or more years of hardship and high levels of unemployment may opt to move to Australia. Most young Europeans can obtain 12-24 months working holiday visa online, which can lead them to permanent residence.
Facebook and employment
Two recent cases for unfair dismissal under the Fair Work Act for termination of employment for Facebook postings by an employee have had contradictory results.
In O’Keefe v William Muirs Pty Ltd t/a Troy Williams The Good Guys (2011) FWA 5311 the employee was terminated for using his Facebook outside working hours to express his dissatisfaction with his supervisor and commission payments. Although the employer was not named, it was identifiable by virtue of co-workers as the employee’s Facebook friends who could view the comments, identify the employer and pass on comments. This was held to constitute threatening behaviour and the employer was justified in terminating employment.
In Fitzgerald v Dianna Smith t/a Escape Hair Design (2010) FWA 7358 the employee posted her job warning and comments about no bonus. The employer argued that clients could have seen this site and it was damaging to business. The tribunal found the comments foolish but not detrimental to business, so the employee's dismissal was harsh, unjust and unreasonable.
What do employers need to do?
Ensure that workplace policy defines acceptable use of IT, in and out of working hours, as relates to employment.
If the policy is breached, consider:
Were the comments threatening?
Was the employer named?
How many people could have seen the comments?
Were the comments likely to cause damage to the business?
Check your employment agreement and workplace policy with a lawyer.
© Brian Hillman 2011
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