Sunday, July 15, 2012

One European Crisis, Different National Fates

We often use the term “European Crisis,” but not every country in Europe is experiencing the crisis in the same way. In fact, there are several countries that are doing quite well. On a sub-national level, Eurostat reported that unemployment in 2011 ranged from 2.5% in Salzburg and Tirol in Austria to 30.4% in Andalucía in Spain. These three regions are occupying the same economic space only in a very abstract way.

Inspired by that report, I looked at a few more metrics (see table). Of the 502 million people who live in the European Union:
  • 55% live in countries where real GDP was higher in 2011 than in 2007.
  • 95% live in countries where real GDP grew in 2011.
  • 64% live in countries where real GDP is expected to grow in 2012.
  • 71% live in countries whose cost of borrowing has declined relative to pre-crisis August 2008.
  • 46% live in countries where unemployment went down in 2011.

What do these numbers tell us?

First, they are a useful reminder that this is not a “European” crisis at least not in any meaningful sense since a lot of people live in countries that are doing well economically. Given the debate about whether this crisis is due to country-specific problems (corruption, red tape, state intervention, etc.) versus systemic flaws (common currency, European leadership, capitalism, etc.), such variance in outcomes means it is hard to put all the blame on systemic flaws alone.

Second, mobility of capital and of people is insufficient to level outcomes (of course mobility can only okay a role). Eurostat reported that, “In 2011, there were 48.9 million foreign-born people living in the EU27 Member States, with 16.5 million born in another Member State than the one in which they live (3.3% of the EU population) and 32.4 million born in a country outside the EU27 (6.4% of the EU population). In total, foreign-born people accounted for 9.7% of the total population of the EU27.” By contrast, in the United States, the foreign born population was 12.9% in 2010, and the share of people who lived in a state other than the one they were born was 27%. In other words, the “natives” made up 90.3% of each European country while they made up only 58.8% of each US state.

And third, the political economy of the EU remains precarious. For one, such a variance in experiences mocks the idea that this is in fact a “common union.” But more generally, it risks creating a greater backlash in the periphery. People often tell me that Germany does not want to solve this crisis because its economy benefits from it. I do not share that view, but I also recognize that as long as the European economy continues to operate in many tiers, such grumblings will only get louder. And over time, they can only cause harm to the union.

3 comments:

  1. 1. on the dichotomy in the economic metrics.
    It depends on the metrics you use, I think. I can see some commonalities by using different metrics. The flight to safety effects saving and consumption patterns everywhere in europe, I think.

    For example, german housing prices are rising quite steeply, after 30 years of designed stagnation. And the reason is quite simple. It's difficult to be a devoted saver - the default german position - if your pension plan and your bank account is declining in real terms. Which they are, and which they will be for some time to come.

    Does that look so different to what many greeks are doing (if they have the savings to transfer abroad?)

    And the GDP forecasts are looking grim, even if domestic demand is holding up, for the above reason.

    2. On mobility of capital and people.
    Granted, it's low compared to the US. Higher cultural barriers I think mostly.

    3. On the dichotomy in political economy.

    A recent poll had 55% of the german respondents citing the eurozone crisis as the biggest threat that they saw. People are undoubtedly scared and uncertain, for all the economy has held up well. Just in the last two weeks there has been:

    -the german economic profession fighting bitterly and publicly with each other over the concessions at the last summit.
    -the german president telling off the german chancellor for not explaining the situation to the populace clearly enough
    -various german politicians criticising the supreme (constitutional) court for daring to hold up the eurozone rescue

    I think people know that they simply can't afford to let the eurozone collapse, but most people don't know the figures for that. Most don't even know that germany has, indeed, made a relatively small profit so far from the crisis, due to lower borrowing costs, and the fact that all the money so far, has been simply guarantees backing EFSF funding raised in the market.

    (Klaus Regling did say it, in an interview with a news magazine a few months back. I haven't seen that message come across clearly from the government though).

    That will change when (if?) the ESM comes in, as it has paid-in capital too.

    And, of course, the fear is that greece (or other countries) will default, come what may, in which case those guarantees fall due.

    It's a pretty pernicious divide in perceptions, all right. And all coming to a head in september, probably.

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    Replies
    1. Sorry, it needs some courage to say that Germany makes a profit from the crisis, because it can refinance cheaply the credits that it takes out to Greece and others (and which are unlikely to be paid back). And what about the haircut of 107 bn Euros? Germany has had to take over a big part of that, estimated at over 20 bn, the part paid by the German government is said to be around 14 bn. Probably these estimates are too low, because few people want to admit what a disaster the euro really is. And one has to be very optimistic to believe that there will not be big further losses.
      Saying that Germany profits from the crisis is just adding insult to injury.

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    2. "Probably these estimates are too low, because few people want to admit what a disaster the euro really is"

      the calculation of what the losses would be are complex (who exits? What is done with Target-2? and so on). The article below outlines the "pessimistic german" view of the profit/loss of germany's time in the euro.

      http://www.nytimes.com/2012/06/27/opinion/germany-the-euro-winner-hardly.html

      But that view (which I do think far too pessimistic) is out-shouted by articles like:

      http://www.businessweek.com/news/2012-07-17/merkel-export-machine-s-gains-exceed-bailout-costs

      All in the only-participating-in-the-bailout-via-IMF anglo-saxon press, naturally. To pick a quote out of the second:

      “Do they [german policy-makers] care? I don’t think so,” (from some analyst or other)

      Yeah, right. Germany's debt:gdp ration, on current liabilities, if this goes bad, are already well above 100%. Care? Of course not, the german government makes €280bn of guarantees for laughs (irony)!

      But these stories, I assume, play very well in the periphery.

      Like Nikos said, it's not a unified political economy. And some outsiders seem to be doing their best to make it less unified still.

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