Europe's Problems Won’t Be Solved In Two Days, One Night

In the film “Two Days, One Night”, Sandra returns to work from a nervous breakdown to discover she has lost her job – her bosses decided they can make everyone else work that little bit harder to plug the gap. The bosses then say she can keep her job, but everyone else will lose their €1000 bonus. Sandra [Marion Cotillard] then has just the weekend to convince the majority of her colleagues to vote in her favour.

Despite my love for French-speaking cinema, I found the film too slow paced and a bit – well, boring. But what has struck me since was the cinematic serendipity of the film’s subject and the current dire state of European labour markets, which is one of the major drivers of falling consumer prices across the continent.

Like Sandra, European companies are facing a choice – to re-hire all those people they fired during the crash when demand fell slack, or to give their existing employees a pay rise and create modest wage inflation. This is called the “insider outsider” hypothesis, developed by Assar Lindbeck and Dennis Snower in the early 1980s.

Wage inflation is around 2 percent in Europe. It is a key metric for economic health and is used to stave off falling prices (deflation), the threat of which is obsessing the European Central Bank at the moment. It is ultimately easier to let inflation rise and whack it on the head with interest rates than it is to heave an economy out of deflation, according to Legal & General Investment Management economist James Carrick.

Despite modest wage inflation, unemployment is astronomically high in some Eurozone countries – Spain is around 24 percent – with Europe-wide unemployment at 11.5 percent.

Certainly, this is a strong contrast to the UK, where the central bank is delaying the rise of interest rates due to a lack of wage inflation although employment is improving – there are more and more people in work per household as the economy picks up and we move away from the male breadwinner era.

LGIM’s Carrick argued yesterday at a press briefing that the unemployment problem in Europe is not cyclical, as some participants like to argue. The problem, he said, is structural.

There is in fact a disconnect between current high unemployment and the rising number of European companies that claim they cannot fill vacancies. Perhaps people’s skills lie in the wrong areas, perhaps people are moving abroad to find work, or, for the cynical minds, perhaps some people prefer to sign on for state benefits. There must be some logical conclusion, but we just don’t know what it is.

LGIM demonstrated that unfilled job vacancies and stable commodity prices are two major factors which suggest deflation in Europe has bottomed out, and we may start to see a pick-up in prices.

Despite the above laments, ETF investors tracking European assets have enjoyed decreasing 10 year government bond yields and strong equity returns year to date. The Eurostoxx 50 Index is up over 8 percent since the start of the year, and close to 22 percent in 12 months.

But Sandra is not out of the woods yet – even if she gets her job back. (Watch the film to find out. Don’t take my review as gospel; the Guardian’s Peter Bradshaw gave it five stars).

While Germany contracted in the last quarter, the French economy has been accused of a chronic lack of growth potential and is calling out for a “Margaret Thatcher” moment, as described by Saxo Bank CIO Steen Jakobsen – the economy needs bulldozing reforms to truly shake up the labour markets.

Because without true reform, Sandra had better avoid another break down as she will have to fight much longer than a weekend to win her colleagues over.

*This article was amended on 5 September to reflect the fact that Two Days, One Night was filmed in Belgium, not in France as originally stated.