What Europe Needs To Do
1 reply to this topic
Posted 29 October 2011 - 03:55 AM
[ Intended to write a short paragraph and got carried away as I sorted out some ideas ... sorry. But at least I solved all of Europe's problems. The bull market may now continue. (comments/critique/body slams welcomed)]
IMO, part of the problem facing European economic integration is that the European social model is expensive and you had different economic "cultures" that funded it prior to integration.
Europeans do not spend as much on defense as the US, and they also benefit from some productivity advantages stemming from urban concentration / transportation / oil consumption. But they have a social model that generally provides more services, benefits, job security (once one has a job), and whatnot than the US.
Before currency union, each country in the common market had their own mechanisms for funding those benefits. For countries like Italy, money printing was always available (and a cup of espresso cost a couple thousand Lira). In France, currency manipulation was an option but rigging / taxing trade flows was an even better one (a vestige of colonial power and diplomacy). Industrial powerhouse West Germany simply created wealth the old fashioned way.
Prior to currency integration you had diverse economic "cultures" whereby these economies delivered social benefits. But these countries also had demographic advantages that have disappeared. Retirees in the 1970s were funded by a large, young post war work force. Even that large workforce needed to be augmented, so you had a large influx of foreign workers to boot (Germany still has a significant Turkish population). All that activity produced the taxes and fees needed to fund a welfare state (aided by borrowing/monetizing in places like Italy which has an industrial north and a "less than industrious" south).
What the Euro did (and Maastricht in particular) was tie the hands of wannabe member states via "criteria" for membership that were meant to enforce fiscal discipline. That is why Italy was considered borderline on entry and Greece moreso. I was working in Italy when the currencies were getting pegged in the late 90s and the complaints about the austerity measures (which were quite mild) showed how Italians looked at public budgets in a way that Germans simply didn't.
Now consider the reality today - you have an economic slowdown coupled with a retiring population with fewer workers per retiree to fund benefits. So the stresses on the social model are both demographic and temporal. The mechanisms for dealing with it are limited because of the treaty and the dominant culture behind it.
We all know there are two ways to deal with such problems - productivity growth or money printing. Money printing is off the table even though that was a tool that made Drachmas and Liras so darned cheap. Germans won't go back to the era of wheelbarrows of cash to buy a loaf of bread because of what that environment allowed to come to power. At the same time, Germany needs to recognize that every Euro nation can't hit Germany productivity growth - few counties have the geographic advantages Germany has (like the Rhine and Ruhr rivers which don't host an industrial megaplex by accident). Mykonos can't be transformed into a automobile production island - just transporting the steel would be prohibitive. Greece is basically a collection of Islands and a mainland that is a coastal strip and rugged hills. Greeks aren't going to develop into a little Germany regardless of the social conditioning austerity might bring.
Getting back to the European social model - I bring it up not to scapegoat it but to place it in historical relief to the United States. When the US was younger it funded the government largely through tariffs on trade and via capitations (a tax "per head" levied on every resident which was common at times of war prior to the US Income Tax being introduced via constitutional amendment). Under such receipt constraints, the US government was quite small. States provided most of the government services one might encounter and paid for it more easily via property taxes. Still, government in whole was smaller as a percentage of GDP because there really was no welfare state. Point being that the US effected currency union and developed different regions around different resource and infrastructure advantages without the burden of a post industrial social welfare model. This despite having culturally different regions (example: Louisiana is and was quite distinct from New England both in terms of business/social culture and in terms of how "fungible" the law is considered to be).
I actually think Europe could turn this crisis to a long term advantage by being "Hamiltonian" and consolidating their own Federal Reserve system, issuing Eurobonds separately from those of sovereign debts and then focus attention on regional productivity development based on the resource advantages present. Example: Greece should not build cars but it is ideal for refineries, yet only has 3 refineries with a total production of 300,000 bbl/day. Germany has over 13 refineries inland, one of which matches all of Greece's capacity. Do refineries employ a lot of people? No. But they provide a very concentrated property tax base - something Greece can use. Greece is suited for services and tourism - it needs some "tax anchors" to stabilize tax flows from cyclical "winds" one sees in tourism and services. That is one example.
Europe needs both hyper productivity and some monetization flexibility to get through as a whole and come out stronger. There are and will continue to be cultural differences that extend to things like how taxes are paid and work ethic. But those are minor obstacles when compared to trying to get a region to develop economically when there are structural disadvantages built into the solution. Greek workers won't every resemble German workers because they do different work. The Greek government hasn't been all that adept at getting those folks working in industries where they can develop productivity advantages but a European development bank might be better at it. All without having to abandon a social model (though it may still get scaled back a bit).
Posted 29 October 2011 - 11:03 PM
Great post, I hear what you are saying. But the "Hamiltonian" solution seems to require the viewpoint of a young country, with no long term axes (axis?) to grind. Meaning that it won't work there without a LOT of pain.
There is a supreme difference now in global financial interdependence.
I think we are on the cusp of something much greater and dismal.
Don't look too close...
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