Labour cost competitiveness increasing

Unemployment in Ireland is unlikely to decline substantially from its current high levels, given the weak European economy despite labour costs returning to pre-euro days, according to the OECD.

Slashing global growth forecasts in its economic review, it recommended retroactive recapitalisation of Irish banks, saying it would ease repaying sovereign debt relayed to bank support, adding its voice to those of the IMF and Ireland on the issue.

Competitiveness in labour costs in Ireland and Greece is back to 1998 levels, relative to the rest of the eurozone.

It could be even higher for Ireland if the public and private sector costs were separated, given recent reports of an increase in income among public servants.

It notes that Germany’s unit labour costs are 23% below what they were in 1998, and the they would need to rise by this percentage to restore relative competitiveness levels with the rest of the eurozone.

The report praises the Government for “doing its homework”, overshooting targets for consolidation and being rewarded with a marked fall in bond spreads.

However, it says improvements in the budget positions next year and in 2014 need to be implemented but, in line with its advice to the eurozone generally, the timeline should be extended if growth turns out to be weaker than expected.

Any decision to give countries more time to reach targets should be taken at EU level and not left to individual countries, as this could leave them vulnerable to markets, the OECD cautions.

It describes the recovery as moderate, with GDP to strengthen by 1.3% next year — down from the previous forecast of 2.1%, and to 2.2% in 2014. “Employment growth is therefore likely to remain subdued and the unemployment rate stubbornly high,” said the OECD.

It acknowledges pro-cyclical fiscal tightening is, in principle, undesirable, but notes that the programme countries have little room for manoeuvre.

The report from the Paris-based research body warns that only a full multi-pillar banking union will break the adverse negative loop between sovereigns and banks. The planned single supervisory system will not be sufficient with the direct recapitalisation of banks.

“In the near term, given the high level of legacy debt and the limited resources available through the EFSF/ESM, the temporary mutualisation of debt above a certain threshold, subject to conditionality, might be a means of impeding this feedback loop,” said the report.

The ECB’s bond-buying outright monetary transactions scheme can also stop the loop between exit risk and bond yields, the OECD noted, but added that it was essential for the eurozone to act, as there was an on-going risk of bond yields rising significantly in many countries, which could trigger global consequences.