The Greeks are not drinking medicine; they are drinking hemlock
In any monetary area (be it the US, UK or USA or Eurozone) there will always one area or region which will have a competitive advantage over another. Industry, finance and businesses concentrate in areas that confer to each other economics of scale and advantages over others. There is always a risk that disparities between regions (economic growth rates & living standards) will lead to separation and breakup. A monetary area peacefully avoids this by either (1) moving funds from its core to its periphery (2) or by its people and resources willingly moving from the less prosperous to more prosperous regions (prices/costs fall in the periphery and rise in the core). When neither happens, the monetary area descends into war, dictatorship, repression, unrest, civil wars, independence movements and revolutions.
Europe is a collection of diverse economies and cultures which, by their very nature, imply structural rigidity; a place where common currency is accepted but a common debt cannot be, without some form of deception; a place where labour mobility gets lost in translation and generates racial tensions; a place where member economies do not share a common growth path; a place, which therefore cannot share a common dream or future. There was and will be no real convergence. There is no legitimate central fiscal authority and no democracy at the centre.
The mechanism for relocating resources and investment funds across the Eurozone members mis-fired from day one (moral hazard, too big to fail over-lending poor investment decisions). -- Primer on the Banking crisis: (Prof Karl Whelan's Lecture notes - Incentive Problems in Banking) Euro-leaders responded with ridiculous rescue attempts to save financial institutions that deserved to fail. The effect: zombie institutions stand; countries fall, facing depression and regional (or country) depopulation. The 'Psuedo Macroeconomics' of debt management and debt collecting policies is destructive and self-defeating.
Fiscal compact agreements will lead to the break up of the Euro-zone and even the breakup of member countries themselves. Capital does not move to a political unstable declining region. It moves the other way.
The Competitiveness buzzz, Aggregates, Averages and Unit Wage CostsThe crisis began as a financial one. But somehow a switch has been done: from market failings of Global and Europe's financial system to the market failing in labour markets, repackaged, dished out as medicine in unit labour costs. Productivity and efficiency are problems, but what are they and where do they lie?
Aggregates and statistic averages can hide, blur and distort many things. Productivity and efficiency is not just about unit labour costs, the number of hours worked or how hard a Greek or German works. Its what these costs represent, or how productive or non-productive these hours of effort are.
OECD figures may be questionable - that the Greeks worked in 2008 on average worked 2120 hours per year (second only to Korea in the OECD but then what do all these extra hours produce? Armies of bureaucrats, corruption, lawyers, accountants .... in Greece and in Europe. The system in Greece is inefficient, but it is more than just about the actual persons who clocks in the hours.
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Statistics, Lies and Sadistics
Should we speak about incomes in general or wages costs? In Greece, nominal incomes from property rents and dividends (excluding corruption, undeclared offshore accounts) rose four times as fast as wage incomes (and 'real incomes' is another story).
The average wage is not the wage the 'average person' receives. Income distribution (inequality) is not a 'Normal Distribution with a few poor people, a few rich people and the rest in the center. The averages wage is not what the average person earns. When the distribution is not symmetric, the average can be misleading.
What does average incomes, wages, costs, etc mean in real terms to the average person? Inflation in Greece has always been significantly higher than many other Euro Zone countries. Rich and poor experience it differently, if basics rise faster than luxury goods and housing and rents soared. The very people that lost out on this, were the first suffered austerity. The aggregates printed in newspaper bury many stories.
One of the main causes of inefficiency in Greece is the lack competition caused by local cartels, monopolies (and a weaker buying power for smaller business in wholesale markets). Yet it is unit labour costs that are first. The leading companies retained or even increased their profits while small businesses collapsed around their feet. Initially consumers suffer higher prices as cartels and monopolies were easily passed on. When deflation set, wages (if paid) fell at a faster rate than prices. Lower wages didn't lead to a more labour being demanded. Instead, unemployment rose rapidly as domestic demand collapsed.
Greece's entry into the Euro meant that the prices of basics went up, while the prices of luxuries fell. The rich saw the price of their "basket of goods" fall; the poor (and those not employed by the state) had a very different experience of this 'inflation' rate. The percentage of income spend on rent and food by those who had to work increased and, worst, credit cards were thrown them promising the 'European Dream." The basket of the typical Greek Mediterranean lifestyle, so desirable in Western European supermarkets, is now too expensive for most Greeks. It is exported and processed food import (at an fixed exchange rate that generates a balance of trade deficit)
What exactly is competitiveness? A economic textbook explanation would look like
Competitiveness is a measure of a country's advantage or disadvantage in selling its products in international markets. - the price of foreign goods relative to domestic prices.
It is a massive leap of faith to jump to unit labour costs, the ratio of nominal wage growth to labour productivity.
Confining ourselves to using only unit labour costs would suggest that an economy is more competitive the smaller the share of GDP/National Income that wage earners receive. So countries like Greece must need to implement policies that pressure wages (and without economic growth, living standards) downward. Except, in Greece, it is not only about the wage / profit share divide of the cake but rentier incomes that seem to be almost immune and embedded in a corrupt political system.
The concept of international competitiveness encompasses many factors that do not lend themselves readily to quantification eg the capacity for technological innovation, degree of product specialization, the quality of the products involved, or the value of after-sales service are all factors that may influence a country's trade performance favorably. Unit labor costs, by themselves do not say much. It is just one factor in the production mix. Efficiency depends on the mix of factors and the scale of the operation - size matters.
Attaining high rates of productivity is often seen as a way of improving competitiveness, but it does not necessarily mean that the possession of such nice statistics will boost sales. (a silly example: sacking every one apart from the most productive worker in a country would produce very good average productivity figures and an output that no one in the country can afford to buy). Productivity and efficiency, relates also to what people want and the ability and access to buy it. Mass unemployment and idle resources is wasteful and inefficient
Reducing the income generated by labour by reducing nominal wages may even hamper economic growth. Kaldor’s paradox showed that the fastest growing economies in the post-war period also experienced faster growth in unit labour costs, and vice versa. Low unit labour costs causing higher economic growth rates is far too simplistic.
Reducing wages share of national income, that is increasing productivity (increasing output per euro spent on a worker) increases profits (and according to neoclassical theory) kicks off recovery and economic growth. If investment does not happen (and remember that the whole mess began in the financial markets) then, like the 1930s , we are in deep trouble. The issues returns back to capital. With everyone playing a 'beggar-thy-neighbour' unit labour cost game, there is no demand and markets to safely invest in.
European policy makers (and as they are un-elected officials often with connections with the Banking community) too easily assume efficient financial markets and, when things go hopelessly wrong, too easily blame the labour market. 'Correcting' the labour markets will not save a flawed EuroZone financial system. It will not created the economic growth to save it.
Euro-leaders and politicians sit happily trapped in a euro-bunker of their own making, protected by the best firewalls money (or rather the Euro) can buy (symptoms of Groupthink).