Animesh Ghosal : Η κρίση της ευρωζώνης και η απώλεια ανταγωνιστικότητας σε χώρες όπως η Ελλάδα

Σε ένα εμπεριστατωμένο άρθρο του ο διαπρεπής οικονομολόγος Animesh Ghosal στο DePaul University στοΣικάγο των ΗΠΑ, αποδεικνύει με στέρεα επιχειρήματα στοιχεία ότι η κρίση της ευρωζώνης οφείλεται στη δημιουργία του κοινού νομίσματος του ευρώ σε χώρες με πολύ διαφορετικές οικονομικές συνθήκες. επίσης αποδεικνύει τη δραματική απώλεια της ανταγωνιστικότητας για τις πολλές  από τις χώρες της ευρωζώνης όπως η Ελλάδα σε αντίθεση με τη Γερμανία. Παραθέτουμες πιο κάτω το άρθρο στην αγγλική γλώσσα, με εξαίρεση τα πολύπλοκα γραφήματα που δεν είναι δυνατόν να εμφανιστούν στο παρών blog, αλλά είναι στη διάθεση κάθε ενδιαφερόμενου που θα τα ζητήσει στο  thkatasneevas@gmail.com.

Competitiveness and the Eurozone Crisis

Animesh Ghoshal

DePaul University

The author would like to thank Michael Morrone for excellent research assistance.

Competitiveness and the Eurozone Crisis

For the last five years, the Eurozone crisis has been in the headlines of economic and financial news. In Europe, painful austerity measures have been undertaken, with a planned fiscal consolidation between 2010 and 2014 of 25% of GDP in Greece, 18% in Ireland, 12% in Portugal and 8% in Spain. There has been a large number of bank failures, often followed by bailouts adding to the public debt. Uncertainty has led to large withdrawals of funds from  bank deposits, including 700 billion euros in a single day in Greece. Unsurprisingly, the economic crisis has been accompanied by political unrest, with frequent demonstrations, occasional riots, and several changes in government. The impact has not been confined to countries using the euro; Britain, the US, and China, among others, have been affected through their trade and financial links with the eurozone.

It is the contention of this paper that the crisis and its threat to the fragile world economy were predictable. Even before the crisis began to erupt in 2009, economic indicators pointed to unsustainable imbalances within the eurozone, and the failure to recognize this was a major managerial failure on the part of political and business leaders. The roots of the crisis can be traced to the establishment of an Economic and Monetary Union (EMU) with a common currency for countries with very different economic conditions, and the concomitant loss of competitiveness for many of them.

When the euro was introduced in 1999, there was considerable excitement about the expected benefits of a currency union.  Increased price transparency across countries would allow consumers to compare prices, and bring them down. Transaction costs for cross-border purchases and travel would disappear. More significantly, for businesses, a single currency would eliminate transaction risk, translation risk and economic risk relating to changes in exchange rates. Possible disadvantages were noted, such as the loss independent monetary policy and the loss of exchange rate flexibility in the presence of rigidities in national goods and labor markets. However, the prevailing sentiment was that the benefits would greatly outweigh the costs, and lead to large welfare gains. Today, with a Greek default, the first by a developed economy since the Second World War (though the default was labeled a “restructuring”), increasingly serious discussion of one or more members leaving, and even concerns about the eurozone breaking up (Wolf, 2012)[1], it is evident that the hopes were misplaced.

A brief timeline of events can be used to show the evolution of the crisis. In September 2008, a banking crisis erupted in Ireland. The Irish government guaranteed the debts of major banks, and subsequently nationalized them. In 2009, the government of Greece revised its estimate of the budget deficit from 3.7 percent of the GDP to 6 percent, then to 12.7 percent. A final revision by Eurostat put the figure as 15.4 percent. In May 2010 Greece, essentially shut out of financial markets, received an emergency loan or “bailout” of 110 billion euros from other Eurozone countries and the IMF. In September, the European Financial Stability Fund (EFSF) was set up as a temporary mechanism to deal with similar exigencies in other countries; in November Ireland turned to the ESFS for a loan of 85 billion euros. In May 2011 Portugal was given a loan of 78 billion euros. The EFSF capacity was expanded in July, and Greece received a second bailout of 130 billion euros. As these loans were conditional on fiscal retrenchment (i.e., raising taxes and reducing government expenditure, there was vigorous opposition in the recipient countries. Following a series of violent demonstrations, in Greece the Papandreou government resigned in November; in the same month the Berlusconi government resigned in Italy. Both were succeeded by temporary governments led by non-political figures. In May an inconclusive election in Greece left the country without a government for a while. In June, European leaders agreed to provide Spain with a loan of up to 100 billion euros to recapitalize banks[2].  In September, the European Central Bank announced a new and potentially unlimited bond buying program to reduce borrowing costs for struggling countries. The ECB President justified this on the grounds that it was necessary to address “unfounded” fears about the survival of the euro.[3]  

 

To analyze the crisis, we focus on the 11 original adopters of the euro in 1999, plus Greece which was accepted in 2001[4]. The Euro-12 can be divided into two groups. The first group, often referred to as the “core”, consist of Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. These countries are those which have not run into financial problems, particularly regarding their ability to borrow from financial markets. The other group, referred to as the “periphery”, is comprised of Greece, Ireland, Italy, Portugal and Spain; these have come under severe pressure from financial markets.

The countries in the periphery are, of course, not identical, and have had different factors leading to their financial difficulties. Greece has struggled with a large budget deficit, widespread tax evasion, and unreliable official statistics. Ireland and Spain had property bubbles and banking crises. Italy faced a large government debt and very little economic growth in the last decade. A major problem for Portugal was the nature of its export products, more than 50 percent of which are deemed to be in competition with China[5]. But they share a common feature—all had large and rising current account deficits. after adopting the euro. While the Euro-12 as a whole maintained a balance close to zero in the period 1992-2008, there were rising imbalances within the bloc, particularly after the advent of the euro in 1999. Figures 1 and 2 show the current account balances of the individual countries, while Figure 3 shows the aggregate current account for each group. We see that from 2001 onwards, the combined deficit of the periphery was an almost exact mirror image of the combined surplus of the core.

From an external perspective, the current account balance can be defined as the sum of the trade balance, the balance on income, and net transfers. The trade balance usually dominates the current account, and depends on competitiveness. To analyze competitiveness, we can use a monetized version of Ricardo’s simple model of comparative cost.

 With labor only factor of production, for Country 1 to export a good j to Country 2,

a_1jw₁e < a_2jw₂

where a_1j  is the amount of labor needed in Country 1 to produce a unit of good j,

           a_2j  is the amount of labor needed in Country 2 to produce a unit of good j,

          w₁ is the wage rate in Country 1,

          w₂ is the wage rate in Country 2,

          e is the exchange rate, defined as units of Country 2’s currency per unit of Country 1’s      

          currency

Country 1’s competitiveness and its exports will be reduced if:

a)      Its productivity relative to Country 2 falls, ie., a_1j  rises relative to a_2j 

b)      Its relative wage rate rises, i.e., w₁ rises relative to w₂

c)      Its currency appreciates relative to Country 2, i.e., e increases

Changes in any of these variables can of course be offset by changes in others. Specifically, if Country 1’s unit labor cost a_1jw₁ rises relative to that of its trading partner, Country 1 can regain its competitiveness through a depreciation of its currency, i.e.  a decrease in the exchange rate e.

In the period 1980-1998, the Greek drachma, Italian lira, Portuguese escudo escudo and Spanish peseta regularly depreciated against the SDR, allowing products to remain competitive (drachma until 2000, when Greece adopted euro), as shown in Figure 4.

If the exchange rate is fixed, Country 1’s ability to export will be diminished if its relative wages rise, or its relative productivity falls.  Figures 5 shows changes in the unit labor costs of the Eurozone countries over the period 1992-2008, encompassing roughly the same length of time before and after the adoption of the euro. In the core countries, unit labor costs remained stable or rose slowly after 2000 (with the exception of Luxembourg, which is so small as to have little impact). The dominant core economy, Germany, experienced falling unit labor costs. In the periphery, on the other hand, unit labor costs rose in all countries except Ireland, and rose very sharply in Greece.

The real exchange rate is a simple and useful tool for analyzing changes in a country’s competitiveness. The real exchange rate is defined as:

R = (P/P*)*e

where P is the price level in the country in question

           P* is the price level in its partner country

           e is the exchange rate, defined, as before, as the price of the country’s currency in units of     

           the currency of the partner country

It is easy to see that if R increases (our country experiences a real exchange rate appreciation), the country’s products will become less competitive.

With adoption of euro in 1999, maintaining competitiveness through currency depreciation was no longer possible, and Greece, Italy, Portugal and Spain countries experienced real exchange rate appreciation. Figure 6 shows real exchange rates since 1999. To reduce clutter, only these four countries and Germany are shown.

We would expect this real appreciation to lead to a deteriorating trade balance. Table 1 below, focusing on the trade balance of the periphery countries with Germany, shows this to be the case for all of them. In 1998, Ireland had a trade surplus with Germany, while the other four had deficits. By 2008, Ireland’s surplus had shrunk considerably, while the deficits of the other four had increased. This, of course, was a major contributor to the rising current account deficits of the periphery. 

Table 1. Overall Trade of PIIGS with Germany, 1998 and 2008 (millions of dollars)
		1998				2008
	Exports	Imports	Balance		Exports	Imports	Balance
Greece	1994	4505	-2511		2680	10652	-7972
Ireland	9654	2763	6891		8959	6849	2110
Italy	39892	40544	-651		68826	87907	-19081
Portugal	4788	5514	-726		6879	10401	-3523
Spain	14891	20811	-5920		29361	58378	-29016

Source: COMTRADE

Table 2. Intra-industry Trade, showing leading exports (1998) of PIIGS to Germany
(millions of dollars)
			1998				2008
	Product	Exports	Imports	Balance		Exports	Imports	Balance
Greece	Articles of apparel, accessories	630	26	604		253	99	154
Ireland	Organic chemicals	2961	105	2856		233	179	55
Italy	Nuclear reactors, boilers, machinery, etc	6378	6555	-177		11364	12654	-1290
Portugal	Vehicles other than railway, tramway	1296	1315	-19		2182	2222	-40
Spain	Vehicles other than railway, tramway	4601	5591	-990		7584	17772	-10188

Source: COMTRADE

Table 2 takes a more granular approach, showing the biggest export product (at the HS 2-digit level) of the five periphery countries to Germany in 1998. Since much of the trade among developed economies is of the intra-industry kind, we have exports and imports of the same product. We see that the trade balance in the leading export product of the periphery deteriorating between 1998 and 2008.

Since the trade balance usually dominates the current account, this deterioration of the trade balance was a major factor in the growing current account deficits of the periphery, as noted earlier (Figures 2 and 3). Current account deficits are, by definition, financed by capital inflows. In the pre-euro regime, these deficits were largely self-correcting. Since foreign lenders would not lend on easy terms to the government or the private sector of a country with a large deficit, adjustment occurred either through a contraction of demand or through a currency depreciation.

In the euro regime, on the other hand, current account deficits were easily financed. Since foreign currency risk and government solvency risk seemed negligible, financial markets initially provided easy access to credit. The self correcting mechanism was removed, at least for a while. Figure 7 shows the remarkable reduction in interest rates in the years preceding the adoption of the euro. During the period 2002-2007, financial markets tended to treat all eurozone debt as having approximately the same risk, and the deficits continued to grow.

Current account deficits are not necessarily problematic. In the context of neo-classical growth theory, foreign funds would flow to poorer countries with higher returns to capital. This finances investment, leading to faster growth and catching up. During the process of convergence, it would be normal for poorer countries to run current account deficits. However, the situation n the eurozone was different. Any convergence between the richer core and the poorer periphery was reversed in the early 2000s, and the rising deficits of the periphery were accompanied not by productive investments, but by a consumption boom. Of the investment that took place, much went into property; e.g., in Spain, construction and property loans rose from 12 percent of bank lending in 1997-99 to 25 percent in 2007. Table 3 shows the rapid expansion of household debt in the periphery; by contrast, debt as a proportion of disposable income actually declined in Germany over this period.

Table 3. Household debt as a percentage of disposable income

	1999*	2007
Greece	26	75
Ireland	113	205
Portugal	95	143
Spain	66	118
Germany	107	95

*2000 for Greece, 2001 for Ireland

Source: Federal Reserve Bank of New York

The rising household borrowing was accompanied by an equally rapid increase in public profligacy. In the run up to the euro, the periphery countries made strenuous efforts to improve fiscal balances, to meet the Maastricht criteria. Once they were in, however, there were no effective means of ensuring that they stayed within the guidelines, Figure 8 shows that while Ireland and Spain maintained budget surpluses until 2007, by 2008 all five had deficits.

As, with successive current account deficits, the net foreign debt of the periphery countries rose, it required ever larger outflows of payments to service the debt. Since these outflows are a component of the current account, this made the deficit even larger, requiring further borrowing. While in some cases the debt was incurred mainly by the private sector, private debt, particularly when it involves the banking sector, can easily turn into sovereign debt; this is what happened in Ireland and Spain.

We have today a situation in which all five countries have faced, and some are still facing a sovereign debt crisis. Unable to access financial markets at reasonable rates, they have had to turn to the “troika” of the EU, the ECB and the IMF for assistance, while undertaking painful austerity measures. While Ireland and Portugal have been able to return to long term bond markets on a small scale, and Greece has done the same for intermediate bonds[6], the situation remains fragile. The fiscal consolidation has contributed to extremely high levels of unemployment[7], and led to political and social unrest[8]. While much attention has been given to fiscal balances, the basic issue is one of the loss of competitiveness, and here the periphery countries face a set of untenable choices. The ways to address competitiveness can be seen in the basic Ricardian export condition discussed earlier. They can increase their relative productivity, which is feasible but difficult in the short run. They can decrease their relative wages through a long period of austerity, which is not likely to be acceptable in democratic societies. The third possibility is to change the exchange rate, which is not possible within the euro. 

References:

Alessi, Christopher. (2012). The Eurozone in Crisis. Council on Foreign Relations Backgrounder, July 23, 2012.

Berger, Helge and Volker Nitsch. (2010). The Euro’s Effect on Trade Imbalances. IMF Working Paper WP/10/226. International Monetary Fund.

Hogrefe, Jan, Benjamin Jung and Wilhelm Kohler. (2010). Readdressing the Trade Effect of the Euro: Allowing for Currency Misalignment. ZEW Discussion Paper 10-023. Center for European Economic Research.

Dadush, Uri. (2012). The Competitiveness Crisis. Foreign Policy, April 2012.

Hardiman,  Niamh and Sebastian Dellepiane. (2010). European Economic Crisis: Ireland in Comparative Perspective.  Working Papers 201046, Geary Institute, University College Dublin.

Holinski, Nils, Clemens Kool and Joan Muysken. (2012). Persistent Macroeconomic Imbalances in the Euro Area: Causes and Consequences. Federal Reserve Bank of St. Louis Review, Volume 94, No. 1. 

Lapavitsasa, C., Kaltenbrunnera, A., Lindoa D., Michella, J., Painceiraa J.P., Piresa, E., Powella, J., Stenforsa, A. and Telesa, N. (2010). Eurozone Crisis: Beggar Thyself and Thy Neighbour.  Journal of Balkan and Near Eastern Studies, Volume 12, Issue 4.

Martin, Fernando and Christopher Waller. (2012). Sovereign Debt: A Modern Greek Tragedy. Federal Reserve Bank of St. Louis Review, Volume 94, No. 5. 

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[1] Martin Wolf, “Why the Eurozone may yet survive”, Financial Times, April 17, 2012

[2] At the insistence of the Spanish government, the funds were to go directly to a “Fund for Orderly Bank Restructuring” recapitalize the banks, without formally going through the budget. For practical purposes, this meant that the austerity conditions attached to loans to the other three euro countries were not applied.

[3] “Draghi gets ECB backing for unlimited bond buying”, Reuters, Sep. 6, 2012.

[4] Some EU members did not wish to adopt the euro. Greece was the only member which applied and was originally rejected, because it did not meet the Maastricht conditions regarding exchange rate stability, inflation, and budget balances. 

[5] “All pain, no gain?”, The Economist, Dec. 9, 2010.

[6] Ireland raised 5 billion euros with benchmark 10-year bonds in March 2013, and Portugal issued 750 million euros of similar bonds in April 2014. Greece is still shut out of long term bond markets, but was able to sell 3 billion euros of 5-year bonds in April 2014.

[7] As of this writing (April 2014), the latest unemployment figures are: Greece 27.5%; Ireland 11.8%; Italy 13.0%;Portugal 15.3%; Spain 25.6%.

[8] The announcement of Greece’s first sovereign debt issue in four years coincided with a general strike against austerity measures, and a large bomb explosion near the finance ministry.