Nothing Sucks Like An Electrolux!

This blog is by no way a swipe at Electrolux or the wonderful people of Poland and Croatia. I feel the story highlights some of my favourite themes of late which are global demand and the EU.

Late last month, Lux dropped a bombshell on the 5000 employees it has in Italy. The company has insisted that wage costs must come down significantly. The benchmark they set was the level of pay in Poland. The company claim that the wage cut would be in the region of 15% over the next three years. Of course, they are being economical with the reality (as pointed out by the unions) and if you factor in a reduction of shift hours (plus some fringe benefits) the monthly take home pay could fall by 40%. This move by Lux is nothing new and quite frankly quite understandable in this current economic climate. In 2006 they closed a German plant and in 2012 announced a French plant closure. The biggest shock came last year when they announced the closure of their Australian facility in Orange NSW. Nearly 5% of the town is employed one way or another and has been the largest employer since 1946. The local council did offer to wave taxes for 10 years but when you consider the wage differential (80% cheaper) in Thailand where production is shifting they were never going to reverse the decision.

The chances are that the Italian closure will go ahead despite serious political pressure and promises of tax brakes. So here we are. Poland gets into the European Union. It then gets significant aid of which it spends around $80 billion (last 6 years) upgrading its transport infrastructure. This helps bring inward investment and why not. Wages in Poland are around 1/3 of Germany and even less compared to Italy where the tax system adds an extra 10% to employers contributions verses the EU average.

The EU

The whole idea of a system where new countries are welcome into a trading bloc, given massive aid (to improve the potential living standards of its inhabitants) is a wonderful concept. Much like Communism, the EU is a complete folly. The unemployment rate in Italy is currently 12.7% (with youth unemployment at 40%) the highest rate since modern record started 40 years ago. The debt to GDP is around 132% which is the highest since 1925. GDP is likely to fall for the third year and drop to 2001 levels. But lets all rejoice, Poland has been voted (in a recent Bloomberg poll) the best place to do business amongst its Eastern European and Central Asian partners. Why has Italy fallen so drastically? Because the EU system is not fit for purpose. How can countries which share a common currency allow wage costs diverge so badly. Since 2000 Italian labour costs grew by 36% whilst Germany grew by 11%. If Italy were a small player joining, maybe that would be understandable. However, Italy accounts for around 16% of the EU pie and is a G7 nation. At least it was, at this rate it might just get into the G20 in a few years.

The misery now being inflicted on Italy is no different to that on all the Mediterranean members where unemployment is causing complete despair. But lets all rejoice, living standards are rising fast in Poland. Given further expansion of the EU in recent years, this process of driving down wages for blue collar workers can only continue. It is not only shifting manufacturing that is causing the problem. Migration, as seen by the recent uproar over mobility given to Bulgarians and Romanians, is also driving wage growth down. But lets rejoice, Poles can now afford to holiday in the sun. In my opinion, the only way to save the EU (AND I WOULD NOT) is Gerpell! …Germany to be expelled from the Euro. I first hinted at this in The Elephant in the Room (June 2012) and again in Kurzarbeit achieved where Blitzkrieg Failed (January 2013)…basically Germany is hiding in a weak economic zone to conquer the export world with an unfair advantage.

This argument can only drive further the wedge of inequality. Those that own companies or generally in the elite, can drive down the costs of doing business helping to raise or maintain profitability. The more people (admitted) from greater poverty levels than the core, the worse it becomes. So, all the people in the EU paying taxes to Brussels ( indirect via state tax) are watching the MEPs give ever larger monies to people who will ultimately keep them in poverty. An example of this is the newest member Croatia. Unemployment is over 20% and the economy has contracted for 5 years. The EU has just announced that the youth unemployment scheme will give Croatia EUR128 million. The result of all this re-distribution of manufacturing cost is the potential to re-distribute  (or devalue society) in the wealthier areas. This bodes very badly for Italian infrastruc/Housing values if they stay in the Euro.

Demand

My recent blog hinted that demand globally could be the driving force behind further unrest. This move by Electrolux is just another example of how I believe the end game will play out. Whilst relocating production to cheaper countries is nothing new, after all China was born on the idea, the previous 50 years have seen the developed world substitute manufacturing job losses with service or more commonly Government jobs. For example, in the UK, 1.5 million jobs lost in the last twenty years were offset by state employment rising by over a million. All this was fine whilst debt was not a dirty word and austerity not even mentioned in the corridors of power. All that has changed. When Australian jobs paying around $25 (hourly) are substituted with Thai at $3 the net loss of demand is palpable.

 

 

 

 

 

Monday, February 10th, 2014 Predictions

1 Comment to Nothing Sucks Like An Electrolux!

  1. […] is what I wrote in February this year in my Article Nothing Sucks Like an Electrolux …I still believe the simple solution is GERPELLED …Germany […]

  2. Italy Could Beat UKIP To Braking The EU | Finance Reaper on October 13th, 2014

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