Wednesday, June 6, 2012

It's All About The Real Economy, (Stupid!)

The Eurozone Crisis... what is it about?

a) Debt
b) Deficits
c) Currency rates
d) None of the above

The correct answer is.. (d) none of the above.  Because it's all about the Real Economy (tm), that's why...

Competitiveness is arguably the most "real" indicator for the Real Economy, one that we can use to gauge a nation's economic health.  Here's a chart I constructed based on the latest data from the World Economic Forum's The Europe 2020 Competitiveness Report: Building a More Competitive Europe.

I have used the data to calculate and present competitiveness as percentages of the Eurozone average (blue bars), of Germany (red bar) and Finland's maximum score (yellow bar). Click on the chart to enlarge it for easier viewing..

 Competitiveness In The Eurozone

To make a long story short... how can Spain and Germany (see previous post) share the same currency - and just about nothing else - when Spain is only 85% as competitive as Germany?  It stands to reason that, given no other measures, Germany's economic prowess will  quickly "swamp" Spain's less competitive economy.  Not to mention Greece (at a horrible 75% of Germany's competitiveness), Italy (at 81%) and  Portugal (at 87%).  Even France (94%) is at risk, given enough time.

Germany's solution is to insist on quickly making the competitiveness "deficit" countries more competitive via a wrenching process of internal devaluation and outright deflation. 

Well, it's not working - at least thus far. After two years of pain, the cost of huge unemployment and loss of earned income is simply too high for societies to bear.  At best, the "operation" will eventually succeed, but the patients will be dead!

Europe's laggards unquestionably need the economic reforms contained in Germany's "medicine"; but Eurozone as a whole requires a common fiscal policy (e.g. outright transfer payments between nations) if it is to survive.


  1. "Well, it's not working - at least thus far. After two years of pain, the cost of huge unemployment and loss of earned income is simply too high for societies to bear."

    Whatever the solutions taken, whether deflationary or inflationary, there will be huge unemployment for years and loss of earned income anyway.

    There can be no Santa Claus here. Only ways to get some degree of solidarity.

    Spain has suppressed a massive building sector. It will take time to move to other business. Time and effort.

    ... That one should not let Spain in a permanent deflationary trap is obvious.

    Once Spanish assets get valued decently, there will money moving to Spain.

    The ridiculous pattern that the Zappatero administration and Spanish bankers organised with a view to suppress real estate market price adjustments has only made things worse.

    Spain 2012 is not Japan 1992. Some deflation has to occur. In view of what I have been reported, we are still not in a situation that would justify European solidarity.

    We may be in such situation once a few bankers have collapsed. Before the end of this year. Time has been lost.

    Concerning a global tax picture of Europe, forget it. The level of taxation in Northern Europe leave absolutely no room for anything more. Whatever the naming.

    Some relaxation with the central printing press is the only political joystick available. It will be used of course. In no way, will that change the situation any way. Ponzi have a heavy price, whatever the monetary arrangements and banking tricks.

  2. The idea that countries with such different cultures as Germany and Greece could successfully share a single currency was madness. The EU worked wonderfully as a free trade area and then the bureaurats went too far and have messed up the whole bloody thing.

  3. Of course Germany and Greece can share the same currency. The problem is your conception of a currency as being more than a transactional medium, i.e. a device to avoid barter.

    The Euro was always intended to ultimately function as a medium of exchange and not a place to save. This is why it will become the currency that energy will trade in, while the dollar hyper-inflates.

  4. I hear nothing about the 60% solution these days. On the contrary, there seems to be a new idea to finance all the expenses not covered by taxation with authorised Eurobonds...

    And lots of people with their own ideas about how to save the Eurozone. In this article one M. Hübner proposes a new "cary trade". The strong nations could show their interest in the Euro by emitting new debt at low interest rate and with this money buy debt from weak nations. Reward for the strong: the difference in interest rates. Help for the weak: new debt at lower rates than on the "market". My opinion: why not this new kick in the can?