Fear and Greed by Nicolas Sarkis

Author:Nicolas Sarkis
Language: eng
Format: epub
ISBN: 978-0-85719-229-5
Publisher: Harriman House

Divergent competitiveness within the eurozone

Sharply contrasting competitiveness is another of the deeply rooted tensions within the eurozone. There is a huge gulf in this respect between some of the core eurozone members, such as Germany and Holland, and some of those on its periphery, including Portugal, Greece and Spain. PricewaterhouseCoopers – the global accountancy giant – sums up the problem thus:

“Over the last decade, there has also been a divergence of competitiveness between countries running a current account surplus and countries running a deficit .... The sizable and persistent imbalance has been supported by a complementary flow of credit from the surplus countries to the deficit countries. This has enabled a build up in public and private debt, delayed a correction in competitiveness and allowed the structural problems of the eurozone to be hidden.”

To see what this means in practice, consider labour costs across the eurozone. The real cost of labour in Italy, Greece and Spain has risen substantially since the year 2000, whereas that in Germany has come down. This gives Germany and other core euro nations a key advantage in terms of production costs. The only cure for this structural flaw is for the peripheral nations to endure the painful process of forcing down real wages in their countries.

While extremely painful, reducing real wages is possible. Greece – the most uncompetitive of the lot – has already made significant strides in this regard. As of early 2012, it has driven down wages by some 11 per cent over the last year or so. In its March 2012 report on Greece, the International Monetary Fund (IMF) highlighted the progress made – but also the exact process by which the country had got itself into such difficulties to begin with.

After joining the euro in 2001, Greece’s private sector almost doubled its debt-load relative to the size of the country’s economy. The government also increased its indebtedness substantially, from around 100 per cent of the size of the economy to around 130 per cent. The extra spending was not put to good use. Instead, it went to bolstering the country’s famously generous social benefits, including pensions for early retirees. Wages rose much faster than the rate of productivity growth, while Greek inflation ran beyond the level of most of its trading partners. Locked into the single European currency, Greece’s competitiveness deteriorated by around 20 to 30 per cent.

Although the situation persisted for some years, it was never ultimately going to be sustainable. Bond investors had been willing to take a relaxed view of Greece’s deliberate understatement of its indebtedness and its other rule-bending that had enabled it to enter the single currency in the first place. The credit crunch that first bit in 2007 has laid these problems bare, however. In subsequent years, it became painfully obvious that Greece could not afford to refinance its massive debts at the rates that the market was now demanding.

To avoid defaulting on its debts, Greece has had to rely on bailouts from its European Union peers.

Download

Copyright Disclaimer:
This site does not store any files on its server. We only index and link to content provided by other sites. Please contact the content providers to delete copyright contents if any and email us, we'll remove relevant links or contents immediately.