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Tuesday, July 2, 2013

Why Greece can't be Florida!

Prof. Paul Krugman recently wrote a piece where he compared Florida with Spain. It could have just as well been Greece instead of Spain. He pointed out that Florida wasn't Spain because Florida is part of a fiscal and monetary union whereas Spain is not.

He might have added that Florida is part of a Federal State with federal taxes but that's only a moot point (even if you have a fiscal and monetary union, if there are no federal taxes, the federal government - every time it needs money - has to go to the states. When citizens pay federal taxes, they do so because it is their obligation and they really can't interfere much with what the federal government does with the money. Should citizens instead be asked to come up with money to save Florida, the result might be different).

Prof. Krugman explains that, as a result of the real estate bust, Florida paid less federal taxes but received much federal aid (aid, that is; not loans!). He estimates that something like 5% of GDP went to Florida that way.

As proof for his argument that a fiscal and monetary union can be the answer to all sorts of problems, Prof. Krugman points out that Florida's unemployment rate is now not only down but even slightly below the national average.

So far, so good. But what conclusion does Prof. Krugman draw from this?

The reason for Florida's positive employment development was not an employment boom. Instead, the reason was out-migration: workers leaving Florida for better job markets. And Prof. Krugman cynically adds: "Oh, by the way: further evidence against the notion that “structural” mismatches explain weak employment".

Well, that's exactly what's in store for Greece if the Greek economy cannot be restructured so that it can achieve satisfactory employment levels. With the present level of domestic economic value generation, that simply ain't going to work. Much, much more economic value generation needs to be built up in the country (and, to some extent, brought back to the country).

Otherwise, Greece is going to be for the Eurozone what the state of Mecklenburg-Vorpommern is to Germany: a recipient of transfer payments with a mass exodus of Greek talent to other economies. There is no other way!

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