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A Those Lazy PIGS: Decyphering the Euro Blame Game
As we all know from the media, the Euro crisis results from the mismanagement of public expenditures in Portugal, Italy, Greece and Spain (the "PIGS"). To be more specific, we all know that the mismanagement reflects excessive government expenditure and employees working less and retiring earlier. To put it succinctly, in the European South, people are paid too much, work too little, receive excessive public benefits and retire too early. Unlike the industrious Germans.
There is a small problem with this diagnosis of the Euro crisis. It is false on all counts. To begin in reserve order, the retirement age for the state pension is the same for men in Germany and each of the PIGS, 65, though in Italy and Greece women can take the pension at 60. Pension programs allowing for earlier retirement can be found in the PIGS, and that is also true in Germany, the United Kingdom and France, where accusations of labor fecklessness do not dominate discussions of economic policy (except, perhaps, from the employer associations).
None-the-less, it is well known that the workers in the PIGS compensate for having to work until 65 by working far less than their Euro-North counterparts. This well known "fact" turns out to be the opposite of reality. In order that the labor statistics not be distorted by the financial crisis, I look at 2007. As Chart 1 shows, the average number of annual working hours per employee in Germany in 2007 was less than 1500 (about 30 a week), compared to the average Greek worker at over 2100 (all statistics from the OECD data base, oecd.org). The statistics show that every one of the PIGS had longer working years than Germany, the closest being Spain with seventeen percent more.
It is a well known fact that German workers are more productive. This means that those Greeks, Italians, etc. may be at work longer but they do not do much when they are. Actually, no. The OECD statistics show that during 2000-2007 (before the great recession), GDP per employed person in Greece grew at 2.8 percent annually, compared to 1.1 percent in Germany. Needless to say, the productivity level was higher in Germany, which is the definition of a more developed country.
Chart 1: Working Longer in the PIGS
We grudgingly accept that people in the PIGS may not retire any sooner, and they may work longer hours than in Germany (and France). This does not change the well known fact that the Euro-South indulges the population with social expenditures, and governments spend like drunken sailors on welfare programs for the undeserving. It may be well known but it is not a fact (see Chart 2, again, OECD statistics).
In 2007, government social expenditure in Germany was 25.3 percent of GDP (pensions, education and health care being the most important). Every one of the PIGS was lower, from Spain over five percentage points below, to Italy at 2.3 percentage points less. This result should surprise no one who has a bit of commonsense: Germany is the only bona fide social democracy in Chart 2, and more social spending is what social democracies do (or should do).
Chart 2: Less Social Spending in the PIGS
But what about those deficits? How is it possible for a country to have long working hours and relatively low social benefits, yet suffer from an unsustainable fiscal deficit? A major step to achieve that unlikely outcome is to join an economic club that has post-unification Germany as a member, because the public deficit and debt problems are the mirror image of the more fundamental malady, intra-EU trade imbalances.
In the 1944 Bretton Woods conference that created the IMF and the World Bank, John Maynard Keynes made a bold proposal. He argued that the world monetary and trading system should be governed by the guideline that current trade imbalances be corrected through adjustment by the surplus countries.
At that time his proposal implied that the war-torn countries of Europe would not be expected to eliminate their trade deficits through austerity policies. Instead, the United States government, enjoying a huge trade surplus, would pursue expansionary macroeconomic policies, which would increase demand for European exports. In brief, the surplus country would expand and import, and the deficit countries would also expand, and export. This plan, a global full employment policy, suffered total rejection by the government of the United States (using the Marshall Plan to deal with the trade deficits).
The purpose of the Keynes proposal should be obvious: global imbalances would be resolved through growth, not austerity. It would be useful for the German government to reflect on the ill-fated proposal of Keynes as the Euro countries peer into the abyss.
Chart 3 shows the current account balances of six Euro countries (sum of total net trade, services and short run financial flows, intra-Euro plus extra-Euro). In 2000-2001 all six countries had either small surpluses or small deficits. An extraordinary change occurred after 2001. From a small deficit in 2000, Germany began to accumulate enormous surpluses, acquiring the world's largest net trade balances in some years and second largest in all the others (behind China).
Because most of German trade was with EU countries, it is hardly surprising that the current account balances of the five other countries in Chart 3 went negative, France in 2004 being the last to join the deficit club. If the probability of causality is not obvious in Chart 3, inspect Chart 4, which measures the German current account balance horizontally and that of the "PIGS" vertically. In 2001 the current account was zero for Germany and minus US$ 47 billion for the PIGS (Spain accounting for about half of the latter). During 2002-2007, Germany accumulated US$ 785 billion in surplus, while the PIGS added US$ 804 billion to their previously small collective deficit. During the three years of recession 2007-2010, Germany kept piling on the surplus to the tune of US$ 600 billion, and the PIGS followed in near lock-step with minus 623 billion.
Chart 3: Current Account Balances, Six Euro Countries,
2000-2010, US$
Chart 4: Current Account Balances, Germany (horizontal)
And the PIGS (vertical), 2000-2010, US$ bns
The "back-story" of the euro crisis is a simple one: German de facto merchantilism. Through tight monetary and fiscal policy combined with money wage restraint, the German government successfully pursued a policy of export led growth. One does not need to be an expert in economics to know that success in export led growth by one country will result in import led recession for the trading partners when global demand declines, as it did after 2007.
It also does not require an economist to know that in the national accounts trade deficits must manifest themselves either in a decline in net private sector saving or public deficits (simple accounting identity). This is clearest in Spain where the so-called fiscal crisis results from private sector debts accumulated to finance imports. When the government bailed out businesses by assuming those debts, the private debt fiasco became a fiscal crisis.
So what is the solution? Quite obvious really. In 2010 the European Central Bank buys all of the Greek public debt and the German government embarks on a fiscal expansion that would reduce the intra-euro trade imbalances. Any burning desire of the German and French governments to punish the "lazy PIGS" through fiscal austerity would have been limited to Greece and much easier to impose than under Euro-zone austerity. The European Central Bank did not, German government did the opposite, and now there are four countries at the brink instead of one.
When at Bretton Woods Keynes predicted that the US plan would result in recession and financial collapse for deficit countries he could have hardly imaged it coming in such virulent and irrational form as the current euro crisis. Therein lies a lesson that it is probably too late for the euro-leaders to learn.
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