Monday, November 14, 2011

Is there a hole in the Eurozone's bucket?

Here is a very interesting article and below is a comment on it.


Krugman's comment is perfectly correct in as much as it relates to the US because the US is - as far as I know - the only country in the world which has its foreign debt in a currency which they can print themselves. Other than that, the following sentence applies to members of the Eurozone: "The key constraint introduced by the euro is a different one: competitiveness can no longer be restored through exchange rate depreciation".

In the absence of a local currency restoring competitiveness, the only other variable is the local standard of living. If Greece – as economists have calculated – has become roughly 40% more expensive relative to Germany since the Euro, then Greece has to become cheaper in the same proportion. They call that deflation (as the new adjustment variable). Deflation of 40%? Good luck to democracy!

It is no good to send a mediocre soccer player to Real Madrid and admonish him to improve his game so that he doesn’t get kicked out of the team. There is no way that a country like Greece can, in the shorter term, play level field in a Eurozone with the freedoms of movement of goods, services and capital. If they are forced to do that, they will transfer their capital to, say, Switzerland and buy their goods at cheaper prices in Germany.

Had one known at the time of the Euro’s introduction what one knows now, one would probably not have exposed Greece so quickly to the free movement of goods and capital, particularly when there would be nearly unlimited supply of foreign loans to finance that free movement (imports into and capital outside the country). That is now “spilled milk” and should be considered as a learning experience.

A country like Greece needs above all development aid in the form of know-how. It needs to learn that loans from abroad should primarily be used for domestic investment in projects which generate revenues on a sustained basis. Instead of importing all the consumption products which it needs (or may not even need), the country has to learn (again?) to produce more of its consumption needs domestically (or not consume them). If it needs some temporary protection for “infant industries” (import taxes), why not?

Finally, the country needs to learn that every people is allowed to be as little productive as they wish. That is not the problem, not even with a common currency. The problem begins when people who treasure little productivity want to have the same standard of living as workaholics. That won’t work (particularly with a common currency).

How does one explain that to a country? Either overnight by allowing it to leave the Eurozone (and by waiting for anarchy to unfold). Or by really “helping” a country to develop its potential on its own. The latter takes time (many years, if not a generation) and dishing out new loans from tax payers so that maturing loans from private lenders can be repaid is certainly no “help”.


  1. "The problem begins when people who treasure little productivity want to have the same standard of living as workaholics."

    Citation needed, as the kind people in Wikipedia would say. Because OECD [1], for instance¸ indicates average annual working hours in Greece as 50% higher than those in Germany (2109 vs 1419), with average annual wages around 35% smaller ($21914 vs $32693).

    Rhetorics are cheap when they are not accompanied by hard data and actual research. What this post amounts to is that greek people should work 50% harder than germans while getting paid 1/3 as much.

    Is that your vision for the EU project? Because if it is, the union will be torn apart piece by piece and nothing will save Germany from the flames of depression then.


  2. Perhaps you overlooked that I was talking about productivity and not the number of working hours. What counts is productivity of output and not the timecard of hours spent. "Don't work harder, work smarter" is a well-known saying.

    Yes, it is my vision of Europe that there are different regions with different cultures and different value structures. Even in the USA, a monetary, fiscal and political union with centralized government, you have different cultures and different value structures and --- different standards of living.

  3. You still don't cite sources for your claim of a productivity differential. Descriptions of "lazy people" and "workaholics" are empty rhetorics at best and disingenious propaganda at worst.

    You are also misrepresenting your vision. You do not envision people with different cultures and different valu structures, hence different standards of living; you envision different standards of living with Germany's standing at the very top. Would you accept it if your vision entailed lowering Germany's standards to, say, those of Greece in order to remain competitive in the global market?

    This line of though is dangerous in more ways than one, as our not-so-distant history has well shown. Let's hope the EU project does not succumb to the very dangers it sought to avert.

  4. Sorry, I had assumed some basic familiarity with facts. Let me be very brief on the subject of productivity because one could also write a dissertation about it. Just compare Greece’s per capita GDP (Gross Domestic Product) with that of other countries. In the link below, you find an interesting analysis and links which will take you to GDP-tables.

    Additionally, I would like to refer you to the website of the Bank of Greece which publishes excellent statistics on national accounts, etc. Also, you may wish to review the latest Troika report which includes the most up-to-date statistics on Greece.

    Please allow me to state my personal vision the way I see it and don’t suggest that my vision is different from the way I present it. If you say that I envision different standards of living with Germany at the top, please tell me where I say so.

    Any society which consciously wants to lower its standard of living should be free to do so but, no, I do not think that any society should consciously lower its standard of living just to make others happy. A standard of living “comes about”; it cannot be increased or decreased by command. Standard of living comes about as a result of competitiveness. If, over longer terms, country A is more competitive than country B, the standard of living in country B will decline relative to country A (and vice versa).

    You insinuate that I used the expression “lazy people”. I am not aware that I have used this expression anywhere. Should I be mistaken, please point this out.

    I cannot tell which line of thinking of mine is dangerous in more ways than one (except, perhaps, the line of thinking you read into my writings).