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Debunking the Idea That Labor Productivity is the Cause of Euro Periphery Woes

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“Periphery” seems to be the new euphemism for the Countries Formerly Knows As PIIGS (which sometimes confusingly includes Belgium, since its finances aren’t so hot either).

The stereotype about these Whatever You Want to Call Them countries is that they are less productive than export powerhouse Germany, ergo they need to Work Harder and Accept Lower Wages (liberal use of capitals due to the force which which these pronouncements are typically made).

But this thinking does not stand up well to analysis, as a VoxEu post by Jesus Felipe and Utsav Kumar demonstrates. They contend that conventional wisdom relies on unit labor costs, which is a flawed metric:

….most often, researchers use sector or economy-wide data when they calculate unit labour costs. This implies that they do not construct unit labour costs using physical data. Instead, the denominator is aggregate labour productivity, calculated as the ratio of nominal value added to a deflator, and then this is divided by the number of workers. This is a unitless magnitude. The two notions of unit labour costs, in physical terms and aggregate, are not the same; and the latter is not just a weighted average of the former….

…if competitiveness is calculated through the aggregate unit labour cost, then we should also define the concept of unit capital cost, namely, the ratio of the nominal profit rate to capital productivity….

This matters because looking at competitiveness from the point of view of unit labour costs puts the burden of adjustment on workers. However, we could equally argue that a country’s presumed loss of competitiveness is due to the fact that “machines are expensive given their productivity”.

So why do they think the periphery countries have become less competitive? It seems the real culprit is bad national economic strategy:

This analysis leads to the conclusion that if the underlying problem of Europe’s periphery were lack of competitiveness, it should relate to the types of products they export (vis-à-vis Germany) and not to the fact that their labour is expensive (their wage rates are substantially lower), or that labour productivity has not increased (it has significantly). The problem is that they are stuck in the manufacturing goods also produced by many other countries, especially the low-wage countries.

Reducing wages would not solve the problem. What would an across-the-board reduction in nominal wages of 20%–30% achieve? The most obvious effect would be a very significant compression of demand. But would this measure restore competitiveness? We argue that it would not allow many firms to compete with German firms, which export a different basket, and in all likelihood it will not be enough to be able to compete with China’s wages.

A consequence of this analysis is that Europe’s peripheral countries should make significant efforts to upgrade their export baskets. Greece, Ireland, Italy, Portugal, and Spain should look upward and try to move in the direction of Germany, and not in that of China. Certainly this is not easy and it is only a long-term solution, more so because in a recession firms are unlikely to be willing to enter new products, but it is the way to move forward.

Some have suggested that Germany companies might start outsourcing within Europe if wage differentials were higher, but there is no assurance this would happen on a sufficient scale if internal devaluations were the main adjustment remedy. There aren’t simple answers to any of these rebalancing needs, but more accurate diagnoses improve the odds of getting to better remedies.

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53 comments

  1. Random Lurker

    This situation has been known from a while in Italy; Italian industry apparently evolved as a lot of small enterprises dependent on big French/German enterprises (see for example the abstract of this paper from 1995: http://www.biblio.liuc.it/liucpapersita.asp?codice=17 ).
    The problem is that industrial policies aimed at developing different baskets of products more directly in competition VS Germany/France would be an open violation of both the spirit and the letter of the EU, since it would be a form of economic nationalism.

  2. Kiste

    Also, German companies have already outsourced to a significant degree to East Europe, I doubt lower wages in Portugal would do anything.

  3. Hubert

    Greece is not a manufacturing culture. German companies will not outsource to Greece even if Greek wages go down 70%. Germany has/had Czech Republic, Hungary, Rumania, Poland and surely China as destinations to outsource into.
    There is no way Greece will be able to pay back any of its loans. Neither will Ireland. You either pay in Forex reserves, through foreign takeover of domestic assets or through exports none of which Greece can or will provide here. What exactly should Greece export except olive oil and goat cheese in such quantities? Cars? Machine tools?
    The VoxEU guys are partly right but why not just admit that there is no “solution” to the whole thing? Greece will stay in the Eurozone as long as the Eurozone provides enough Euros for them and their banking system (CAPITAL FLIGHT!!!). Once they default their banking system has to get off the Euro and they will become a nice tourist destination again with the Drachma down two thirds from its Euro-Level. Until that time they will lounder their bank assets into safer parts of Europe.
    I read so many comments how solid Greek banks are relative to their state. Well, HOW IN HELL DO WE KNOW ?

    1. Foppe

      This is the feeling I get as well. But then, so long as they can force the Greeks to sell off their state companies (built with public money, but who cares about fairness) at fire sale prices, after which they really will have no source of revenue (or subsidized transportation, or whatever) left, then the Greeks really won’t have the money any more to pay for the services in their own country (because whoever buys up those companies and utilities will undoubtedly increase the prices charged for them). Perhaps the idea is to get them all to move to Albania so that Greece can become a resort?
      Considering they are being forced to sell off €50B worth of state possessions (16% of their debt-spending-inflated GDP), their “rescue” reminds me more of the strip-mining/neocolonialism (by the IMF/US) of South- and Latin America ever since the ’70s, than of an attempt by the IMF/EU to make the Greek economy stable once more.

      1. Mikhail Kropotkin

        Is anyone going to mention the kleptocracy that has stripped the Greek economy naked prior to the crash?

        Discussions of structural differences in national output are not going to make any difference. Until the ruling class of Greece starts doing something a,part from finding new ways to steal enough of the national output through mechanisms as varied as straight tax avoidance through to the derivatives based theft assisted by a number of multinational banks, then it is all a waste of time.

        Mind you, Greece ain’t the only one…

  4. Candy

    Why would Germany outsource? Everytime “the Eurozone” PTB get it into their heads that Labour Is Too Expensive, they simply allow a new former Eastern European country into the fold and flood their member job markets with fresh cheap labour.

    Temping agencies spring up all over the place to import Polish or Romanian or Estonian wokers who will work for SFA, because what they earn in countries like Germany or Holland or France will buy more in their own countries relative to what they can earn there.

    These temping agencies even buy up cheap cruddy housing for which they then charge their temps rental which takes up 50% of their slave labour earnings, and if they make a fuss, they are dropped.

    Make no mistake: there is a huge slave labour market at work in Europe, so there is no need for core Eurozone states to offshore production. It’s a de facto outsourcing.

    1. Kiste

      These practices are progressively being curbed by mininum wage laws in several sectory, especially construction. Exploitation is certainly a problem, but I think you are overstating the overall impact in the labour market.

      1. Sungam

        That is the case with the legal labour market. However the increasing criminalisation of illegal immigration and immigrants make any significant enforcement of labours laws for them effectively impossible.

  5. F. Beard

    It’s all about giving the usury class their usury. But usury is mathematically unsustainable since the debt grows exponentially while the real economy cannot.

    1. Parvaneh Ferhadi

      True. And their purpose is to conceal this simple fact from the majority of people for as long as possible so that the game can go on until it no longer can go on.

      1. F. Beard

        Common stock is the ideal private money form; assets are simply bought with new stock issue; wealth is shared rather than reaped for the benefit of a few.

        Usury is forbidden between fellow countrymen in Deuteronomy 23:19-20 but not from foreigners. The implication is that usury is a tool of subjugation. And so it has proven to be – so far.

  6. Candy

    Kiste, I was actually not thinking of construction industries when I wrote that. Do not get me started on the construction industry and how badly it treats European migrant workers – 18 year old Polish kids losing limbs and so forth because they are expendable. They are not even able to understand at the hospital when staff are trying to tell them that some severely injured part of their body has to be amputated because they do not understand the local language or English or sometimes even German.

    As for minimum wage laws – sure they get paid the minimum wage by law. A third to a half of that Minimum Wage gets swallowed by temping agencies which rent them crappy rooms in an old school or an old house where they can cram 10 men into it and charge them like wounded bulls for the privelege. Then they have to pay for food on top of that. So in effect, what they can take back to their own country is not even “the minimum wage” in the country where they work. Obviously it is still worth it for them to endure this treatment though.

    Also, I am not overstating the impact on the labour market. You see a profound political shift to the right in most of the “core” Eurozone countries because there is a backlash from the local populace who whinge and bitch about migrant periphery workers. You can see this in countries like the Netherlands where you have hugely popular hard right politicians like Wilders spouting hatred against migrant Polish workers now.

    The eurozone is a racket.

  7. Ben Ross

    Germany’s specialization in the export of more complex products is not an accident, and does not (or not just) reflect its culture and history. It is the result of a conscious policy choice made around 1980 by Helmut Schmidt and his finance minister Hans Matthoefer. See the excellent book “Nach dem Wirtschaftswunder” by Werner Abelshauser, especially pages 360 to 378.

  8. Eric

    This is an interesting challenge to the narrative.

    However, there are times when common sense is useful, and this may be one of them. In my experience, data and frameworks can/should be used to discover the truth and sometimes prove a point (for ideologues who have decided, conscioulsy or not, on “the good”).

    I would regularly see data that contradicted common sense. Soviet living standards similar to the West’s were one.

    So, my reaction to this piece is that it just doesn’t stand up to my experiences with Germany and actual Germans, and Greece and actual Greeks. Seriously, I think just getting a taxi might be the counter-argument to this piece…you don’t need to order machine tools or organize a large conference.

    Moreover, I question arguments in which the conclusion is “we just needed smarter people (usually ones just like the author) with a better national economic plan”.

  9. Maju

    All very much true.

    Just let’s not forget that salaries (and other “wages” such as pensions, unemployment benefits and such) are reliant on the cost of life, which is about the same through all EU (after the hidden inflation “corrections” with the euro earlier this century). So we have that Greek workers have salaries maybe 1/3 or 1/4 that of German workers (and not much of an educative disadvantage, if any at all) but pay about the same (if not even more) for their daily lives, beginning with housing (Germany is one of the few European states without a housing bubble, thanks to welfare policies).

    You cannot lower the salaries of Greek workers even further unless you are willing to allow true slums to grow around Athens and Thessaloníki and squatting to become a normalized way of housing.

    And, of course, as you and Felipe say well, this would in any case imply lowering internal consumption in EU, what is bad for the economy (including the Germany one).

    The only ‘solution’ within a Capitalist frame (let’s not forget that there is always a socialist solution) would be to devalue the euro, because it’s the strength of the euro which makes most difficult for EU states to compete in the global economy. We could blame the USA for devaluing the dollar but actually we should only blame ourselves, the EU, for not keeping the euro-dollar parity (more or less). This is not just because EU competes with the USA, that also, but specially because international prices are fixed in US dollars most of the time.

    Devalue or socialize (or both)… these are the sensible choices for EU. Alternatively it can transform itself into some sort underdeveloped region, full of slums and quasi-slave labor, but that was not the plan, was it?

    However it is, I believe, the current plan of the oligarchies of Brussels. And that means a revolution because it is obvious that if a working class is not going to put up with such abuses that is the European working class.

  10. Rodger Malcolm Mitchell

    The PIIGS (and Germany, too) are not Monetarily Sovereign; they do not have the power to create their money. Over the long term, a monetarily non-sovereign government must have money coming in from outside its borders, i.e. be a net exporter.

    Mathematically, everyone cannot be a net exporter, since worldwide exports/imports net to zero. So Germany’s strength is part of the PIIGS’s weakness.

    The sole, long term solutions for the PIIGS are either:
    1. to leave the EU and become Monetarily Sovereign, or
    2. for the EU (which itself is Monetarily Sovereign) to provide a continuing supply of euros to its member nations.

    The single greatest economic problem facing the world today: Not understanding the implications of Monetary Sovereignty.

    Rodger Malcolm Mitchell

    1. F. Beard

      The sole, long term solutions for the PIIGS are either:
      1. to leave the EU and become Monetarily Sovereign, or
      2. for the EU (which itself is Monetarily Sovereign) to provide a continuing supply of euros to its member nations.
      Rodger Malcolm Mitchell

      I think you have nailed it. Of course countries should be monetarily sovereign. But the private sector should be monetarily sovereign too. Government money should only be legal tender for government debts, taxes and fees, not private ones. And private monies, (including gold) should only be acceptable for private debts.

      Jesus gave us this solution 2000 years ago in Matthew 22:16-22.

      Our money problems derive from attempting to use a single government/private sector money supply.

    2. Jim Haygood

      The single greatest economic problem facing the world today: Not understanding the implications of Monetary Sovereignty.

      Indeed! The Monetary Sovereignty period began on 15 August 1971 when Nixon closed the gold window — a sort of anti-golden era, or Great Leap Backward in Maoist terms.

      Since then, developed country debt levels have escalated to the point of insolvency, economic growth has slowed, and real wages have stagnated or fallen. Inflation (both goods and asset inflation) has been rampant, except for occasional dips into deflation during white-knuckle financial crises. The price of gold has escalated by a factor of 35 times, as debt-backed confetti currencies are relentlessly, implacably debauched.

      So the implications of Monetary Sovereignty (a/k/a fiat currency) are straightforward: RUIN.

      Monetary Sovereignty is just an old-fashioned Ponzi scheme, decorated with a flimsy but shiny intellectual facade of monetarist gobbledygook to flimflam the credulous or attract aspiring psuedo-intellectuals, as the case may be. It denies the fundamental axiom of economics: there ain’t no free lunch. Specifically, you cannot print your way to prosperity. Sorry to burst your elaborately constructed fallacy.

      1. F. Beard

        Specifically, you cannot print your way to prosperity. Jim Haygood

        Then under a gold standard all gold mining should be banned? Or is our way to prosperity to dig up gold and rebury it in vaults?

        The truth is that growth in money supplies (note plural) is NEEDED for prosperity.

        What is needed is genuine liberty in private money creation not the insanity of tying the growth of a single, government enforced monopoly money supply to the mining rate of a shiny metal.

      2. F. Beard

        Specifically, you cannot print your way to prosperity. Sorry to burst your elaborately constructed fallacy. Jim Haygood

        Gold as money is itself an “elaborately constructed fallacy” – for the sake of the usury class.

      3. Rodger Malcolm Mitchell

        Mr. Haygood said, ” . . . developed country debt levels have escalated to the point of insolvency. . .”, a perfect demonstrations that he does not understand Monetary Sovereignty. A Monetarily Sovereign nation cannot be insolvent.

        He also said inflation has been “rampant.” Actually, with the exception of the 2-year period 1979-1981, inflation has been very close to where the Fed has wanted it to be, a testament to the Fed’s ability to control inflation.

        Rodger Malcolm Mitchell

    3. Foppe

      Could you please stop writing the same post at the bottom of every blog post that relates to MS, or can you at least try to work out your point more? Spouting the same generalization over and over is very nice and all, but Monetary Sovereignty, just as every other thing humans have constructed, does not exist in a vacuum, so that ‘purist’ definitions of the problem (hinting at a singular solution) are generally not very useful. To take the most banal example, your MS story cannot explain at all why there are differences between different eurozone countries..

      1. Rodger Malcolm Mitchell

        Foppe,

        I will stop writing the same comment as soon as the debt hawks stop telling people the federal deficit is unsustainable, and that we are threatened with insolvency and other unsupported nonsense.

        As to why there are differences among eurozone countries, the answer is quite simple, and I have explained it at monetarily non-sovereign solution.

        Briefly, a growing economy requires a growing money supply. Monetarily non-sovereign nations cannot create sufficient money for growth, so to survive long term, they must have money coming in from outside their borders. Generally, this means exports must exceed imports (i.e. money imports exceed money exports).

        Germany has focused on exports, so is successful. But since every nation cannot be a net exporter, some monetarily non-sovereign nations must suffer. This is basic arithmetic.

        One could tell all eurozone nations to be net exporters, but of course, this is impossible. They should convert to Monetary Sovereignty, which would allow them to create their currency at will.

        1. F. Beard

          I will stop writing the same comment as soon as the debt hawks stop telling people the federal deficit is unsustainable, and that we are threatened with insolvency and other unsupported nonsense. Rodger Malcolm Mitchell

          I definitely agree wrt the deficit hawks. They can find trillions for defense (actually aggression) but wish to renege on Social Security benefits to people who have paid for them all their working lives.

          Still, government fiat is only 1/2 of the solution. The only debts fiat should be legal tender for are government ones, taxes and fees, not private ones.

          1. Rodger Malcolm Mitchell

            Actually, “fiat money” is a redundancy, as all money is fiat, else it would be barter.

            The advantage to a national money is acceptability. Were each person, city, county and/or state to create its own money, acceptance of that money would rely on the full faith and credit of that person, city, county and/or state, a task that grows difficult with a growing population.

            If I wanted to pay my bills with “mitchells,” and someone else wanted to pay his bills with “smiths,” and a third person wanted to pay with “chicagos,” imagine the complexity in using multitudes of different moneys.

            Simplification was the original goal of the euro. Unfortunately, the EU did not provide a mechanism for monetarily non-sovereign governments to grow. The U.S. de facto solution is for the monetarily non-sovereign states to receive money from the federal government. This money is known as the “deficit.”

            Rodger Malcolm Mitchell

  11. Jim Haygood

    Insightful comments above; all of them. Only Hubert explicitly mentions the remedy of Greece leaving the euro currency zone.

    Whatever the answer may be to gaining national competitiveness (and it’s not simple — if it were, most countries would be proverbial workers’ paradises of luxury and leisure), it’s not likely to be implementable within the urgent 3 to 5 year window imposed by the current crisis of excessive debt, emergency loans and high sovereign borrowing rates.

    Something has to give, and the weakest leak would appear to be the common euro currency. When Argentina stiffed its creditors in 2002 and pulled the plug on its one-to-one US dollar peg, it obtained immediate relief in the form of export competitiveness and an incoming direct investment surge. Other than a brief dip into recession during 2009, its strong GDP growth has continued to this day.

    Since devaluation is so much easier, quicker and more certain of success than a long-term competitiveness strategy, one has to think it’s only a matter of time before one of the peripheral European countries chooses it.

    Like any national federation, the EC is dead-set against losing any chunks of its territory. But the alternative is a level of aid to the peripheral countries which is probably neither economically feasible nor politically acceptable. One can only hope that the departures from the euro currency area will be amicable.

    1. Hubert

      Jim,
      it cannot be “amicable” as we are talking a few hundred billion Euros here (Greek foreign debt plus ever greater parts of its 400-500 bn banking system). I think you were looking for the term “peacefully”.
      The Greeks are actually in a solid position: They can always default, leave the EMU but stay in the other EU clubs, bring in the New Drachma and restart where they were 10 years ago. Okay, the party is over, but what a-heck-of-a-ten-year-party that was!
      The Greek poor, living off their land or their animals, did not profit anyway. The money went to the elites and everybody connected to the State-corruption-complex and the real estate bubble.
      “Peacefully” – military occupation to me looks next to unthinkable, or better absurd. How would you feel about distant relative who wastes a big part of the family fortune, lives well, takes up debt and let you pay for it and then asks for the next loan at the ECB, the family treasurer? I guess the mutual feelings will not be too sympathetic – but so what? Life goes on.
      So I guess it will be peaceful, but not very amicable.

      1. Jim Haygood

        Hubert,

        Right. One could say that the military occupation strategy was tried after World War I with the occupation of the Rhineland. How did that work out? Not so well, as I recall.

        Or, here in the U.S., the occupation of the South after the War Between the States (1865-1877). In a faint echo of Greece’s dilemma with the euro, the U.S. decided to repeg to gold at the prewar parity and sweat out the wartime greenback inflation. This dismal process gave the U.S. economy its longest recession ever (1873-79, actually the first Great Depression), ongoing deflation to the end of the 19th century, several banking crises, and a legacy of southern poverty which persisted for nearly a hundred years afterward.

        So, no, military occupation looks to be counterproductive and unthinkable. As you say, the probable result will be peaceful, in the sense of no NATO tanks rolling across Greece’s northern border. Hardly amicable, but hey — it’s only money.

    2. Random Lurker

      While I can understand why Greece (and others) could be forced to default, or would gain from a default, I fail to see the advantages of leaving the euro:
      a) Going back to the drachma would make no sense while having debts in €, while renaming debt in drachmas would be just another form of default;
      b) as said in the original post, greek wages are already rather low to european standards, so that a fall in greek wages would not be good to Greek economy.
      So I can see Greece defaulting if the EU doesn’t help by actually paying their debt, but I can’t see Greece leaving the EU

      1. Hubert

        Eurozone and EU are different things.
        There are many clubs within the wider Europe. The EURO-Zone is only the most prominent one. Leaving the Euro does not mean leaving the EU.

  12. RebelEconomist

    It is easy to get all rhetorical about this, but I suspect that much of the developed world is going to get poorer in real terms as the masses in the developing world become as skilled as workers in the developed world and able to earn closer to their share of the earth’s limited resources. In the case of Greece, its largest industry is tourism (15% of GDP), and their emerging competitors are destinations like Turkey and Tunisia. It is hard to see what the Greeks can do about it in the short term other than accept less.

  13. Ignacio

    I think it is an interesting paper. I would add that the comparison of the export “mix” among countries is very telling. Complex exports require big, big companies with an ability to direct their activity and subcontractors located elsewere to produce high value items. Automatization is capital intensive and has as a result high physical productivity. In peripheral countries there is a lack of big industrial companies able to direct complex production, thus it is very difficult for these countries to keep on the track of Germany, France, Sweden. Italy is the exception.

    1. Random Lurker

      Italy is not an exception: as the study states in the table “Share in a country’s total exports by complexity groups” dhe percentage of very complex exports on Italian exports is very tiny (0.06%).
      The Italian peculiarity is just that, in many low-tech fields (such as dresses and food), Italians have been able to position themselves in a luxury niche, thus rising for a while the value (price) of their exports.

      1. Ignacio

        I was thinking about FIAT and the industrial conglomerates in the North of Italy. This region, in my view, is in an intermediate position. But you are basically rigth. I know about some examples of relatively small firms in Spain that were outcompeted or bougth by european giants.

        Interestingly, in some regions in Spain (Navarra and Pais Vasque) the regional governments and municipalities push hard to promote local industries with intermediate complex produts, some of then designed specifically for local needs. Many of such industries are not export oriented but reduce imports and create jobs. These regions are doing better than other regions which are focused in services rather than manufacturing.

  14. Peripheral Visionary

    “This analysis leads to the conclusion that if the underlying problem of Europe’s periphery were lack of competitiveness, it should relate to the types of products they export (vis-à-vis Germany) . . . “

    I keep wondering when people are going to figure out that Germany’s success has less to do with its manufacturing sector and more to do with its financial sector (and likewise for France and Sweden, though to a lesser extent). Germany ex earnings from the financial sector would be a shadow of its current self. And it needs to be pointed out that many of the earnings of the financial sector have in effect been extracted from less fortunate countries, among them the European periphery.

    It is like comparing “productivity” between New York City and the rest of the United States: it needs to be taken into full consideration that impressive performance in the former may, to some extent, be coming at the expense of the latter.

    1. Hubert

      Sorry, but the German financial sector lost all the export surpluses of the last years. The Landesbanks alone lost some hundred billions (we do not know how many – my private guess is 200-300). And private banks are not terrible profitable either as margins in commercial banking are, or – at least were – not too big. Deutsche Bank pays nice boni to its investment bankers – but the banks profitability is meager especially compared to its balance sheet (and its off-balance-sheet derivative exposure).

  15. Steve

    There are so many mistakes and simplifications in their argument that it’s hard to know where to begin. It’s very hard to separate capital efficiency from labor efficiency and management organizational skills, all of which impact unit labor costs, productivity measures etc.

    If their point is that unit labor costs by themselves are not a particularly instructive data point, I agree, at least to some extent. Surely comparative unit labor cost would be relevant and instructive if capital and management were equal across Europe (which clearly they aren’t). But it’s as useful of a starting point as anything else.

    One could reasonably argue that superior German capital deepening (the benefits to which aren’t always linear as they depend on production functions) and management organizing principles (the benefits to which are hard to quantify, but are very powerful – e.g. Porsche, et al.) make German labor costs appear lower than they actually are, at least by this static “unit labor cost metric”. Conversely, poor capital/management policies make peripheral Europe’s labor situation look worse than it probably is. Maybe this was Yves’ point.

    Hoping for economic success through better State policies is a pretty big leap of faith, since there is no evidence that these policies created better capital deployment and better management strategies. They then invoke the “deus ex machina” of export growth and State policies to solve the problem. Since export success is a function of strategy, capital deployment, management expertise, etc., it is unlikely to suddenly appear out of the ether.

    Devaluation lowers comparative labor costs. But it does nothing to improve management. It does not change production functions very much in capital-intensive industries. Capital costs may in fact rise after devaluations, thus defeating the original purpose of the devaluation. It probably won’t solve the problem.

    Meanwhile these two guys’ fatuous argument can basically be reduce to this: “Greek workers, politicians and management should become Germans overnight”. Why didn’t the Greeks think of this?

    1. Random Lurker

      I think you misunderstand the point.
      In short German and French industries developed first/faster than industries in the rest of EU, and in pratice monopolized the most profitable branches of manufacturing, wich, not by coincidence, are those branches where scale advantages are bigger.
      Other EU economies couldn’t compete with those industries, precisely because the scale advantages, if not counteracted by a strongly nationalist industrial policy, tend to kill competitors in their cradle. As a consequence, Europe’s periphery is stuck with low-tech industry, where competition from poor countries with very low wages is very strong, whereas Germany for example doesn’t compete very much with China because they export very different stuff.

      1. Steve

        I appreciate your reply. I think I understood their point, as my comments on production functions suggest. I just disagree that State-sponsored policies created the conditions we see today.

        Do you really believe that national industrial policies will suddenly confer hundreds of years of management and technical know-how to peripheral countries? Progress in capitalism is slow and cumulative, reflecting learning-curve effects etc. and the gradual dissemination of management skills etc.

        You offer the “standard narrative” for the failings of peripheral Europe. I beg to differ. Industrial policy doesn’t suddenly imbue the population with the spirit of entrepreneurship, technical skill and management know-how.

        Portugal has few successful corporations, a history of military dictatorship and socialism and very poor educational attainment relative to the rest of Europe. The Industrial Policy that can fix that mess should get the Nobel Prize.

        1. F. Beard

          The Industrial Policy that can fix that mess should get the Nobel Prize. Steve

          The best industrial policy is true liberty which would begin by abolishing the government enforced counterfeiting and usury cartel in Portugal (or anywhere else).

          Strangely, some people resist, often passively to being exploited by the money lenders.

        2. Random Lurker

          *(sorry for the late reply)
          For “industrial policy” I mean straight mercantilism: taxes on hi-tech stuff and so on. This could avoid the “death in the cradle” effect.

          As an aside, I don’t think that pheriphery Europe lacks people with skills: for example in Italy there is a well known problem that we call “fuga di cervelli” (roughly “fleeing brains”), that is that talented joung researchers/scientists can’t find jobs in Italy (either in academia or in business) and have to find jobs abroad.
          This kind of problem shows, IMHO, that the problem for Italy is a sort of geographical division of work rather than know-how or culture.

  16. Ignoratio Elenchi

    Excellent analysis when you still consider Greece separate from EURO-Land. But the idea of the European Union was to stop thinking of separate economic entities, separate real-estate, separate politics, separate clans, separate disadvantages. The tactic was to merge as much as possible into same currency, same freedom of movement for capital, personnel, goods, and services. Freedom of movement allows things to flow toward point of greatest utility. Each revisit to the mentality of separateness will be a nail into the coffin of EURO-Merge.

    Add without segmentation!

    Fly United
    !

  17. other Eric

    the discussion about the club Med countries always seems to go about how to increase export, either by devaluation or internal deflation or other solutions. But the problem was not caused by a lack of export, export was stable, but too much import (paid with debt). So to me the logical way out is make sure this never happens again by putting constraints on the amount of money these countries can loan. This is easier to achieve than trying to increase export to match the import. And for the current debt a one time solution needs to be found like restructuring.

  18. F. Beard

    Actually, “fiat money” is a redundancy, as all money is fiat, Rodger Malcolm Mitchell

    else it would be barter. Rodger Malcolm Mitchell

    Not true. The mistake you make is to conflate government money with private money. They are two different animals. Government fiat is backed by force, the taxing authority of the government that issued it. Private money, OTOH, must be backed by something of value for it to be voluntarily accepted. Of course, anyone who must pay takes must voluntarily accept government fiat in order to do so but with genuine private currencies the government’s fiat would float in value depending on how wisely the government spent it.

    else it would be barter. Rodger Malcolm Mitchell

    Also not true. Common stock is the ideal private money form. Assets are bought with new stock issue. How is that barter? What is swapped? For example, suppose I have a machine tool and a corporation buys it from me with its common stock. Don’t I still own a share of the machine tool I just sold?

    As for the logistical difficulties of multiple money supplies, that is an obsolete concern with today’s computers and communications.

    You have do have 1/2 of the solution – debt-free fiat. However, that fiat should only be legal tender for government debt. Conversely, private monies (including silly gold) should only be acceptable for private debts.

    The fascist gold bugs are seeking to enslave us to a government sanctioned gold standard again. They are using the legitimate concerns about full legal tender fiat, such as “the stealth inflation tax”, to further their cause. Separate government and private money supplies eliminates the “the stealth inflation tax” in a principled way instead of with PMs.

    1. Random Lurker

      “Barter” refers to the exchange of two things with immediate utiltiy, such as cheese for apple.
      Money, on the other hand, refers to something that has not utility, but can be used as a token for exchange.
      As a consequence, all money has to be backed by some kind of force: for example, suppose that I give you some common stock (that is, a paper receipt that says that I gave you stocks).
      Then I refuse payng dividends or recognize your ownership of stocks. What would you do? You would go to the police, thus backing your contract by force – state force, by the way.

      1. F. Beard

        As a consequence, all money has to be backed by some kind of force: … Random Lurker

        Not so. A gold coin is a primitive money form that is not backed by force; it is backed by its traditional use as money. It is not a barter item since the gold coin is typically not scrapped for its metal. Instead, the gold content serves as a guarantee of authenticity.

        Also, the difference between common stock, a private money, and government fiat is that one can easily live without a company’s common stock but government fiat is a daily necessity since taxes are almost completely unavoidable.

        1. Random Lurker

          I think I disagree:
          1) coined metal (as opposed to just metal stick with a certain weight) became of common use quite late, usually in presence of a strong state (during roman republic, for example, soldier were paid in salt, from wich the word “salarium”, salary). During the feudal age coins of metal were used very few, most everyday commerce was made by barter. From an historical perspective, coined metal only existed as supported by state power.
          2) In pratical terms one cannot live without money because he needs to buy stuff such as food, wether the money is privately issued or issued from the states. Only in very different (and much less developed) “systems of production” one could live withouth money.

          1. F. Beard

            From an historical perspective, coined metal only existed as supported by state power. Random Lurker

            That makes sense. Early Roman coins were copper or brass (bronze?). However PM coins such as the Spanish Silver Dollar circulated in the US based on their silver content, I would bet, not because the Spanish minted them. So in a sense, they were independent of government.

            2) In pratical terms one cannot live without money because he needs to buy stuff such as food, wether the money is privately issued or issued from the states. Only in very different (and much less developed) “systems of production” one could live withouth money. Random Lurker

            Agreed. But what is you point? I advocate separate government and private money supplies per Matthew 22:16-22, not the abolition of money.

          2. Maju

            “In pratical terms one cannot live without money”… except in a socialist (or otherwise collectivized) state/society.

            Money is after all just a chaotic rationing card: bank notes are rationing coupons of the simplest possible kind. Let’s just not exaggerate their merits: unlike true rationing cards, money does not guarantee any form of justice.

  19. /L

    European integration is a great idea but EU is a big failure, it hasn’t delivered a better Europe. A monetary and capitalist integration that have shunned social and cultural integration. It has been declared by the eurocrats that they didn’t want cultural integration. The result could very well have been a success story if the aim had been to integrate the people of Europe instead of just integrates the money and capitalist interests. As it is now there is no cross border people’s power in EU, the people of EU is confined in participating nations while moneyed interests is an power operating cross border. This construction is probably with intent so.

  20. Paul Tioxon

    http://www.international.ucla.edu/article.asp?parentid=6126

    Yves, I am not sure if you are just starting off with a non critical throw away opening line about the meaning of periphery in the context of the PIIGS, if you are not, please look into the World System Analysis which relies heavily on the Core Periphery analysis of nations within a world economic system. You can simply google ‘core periphery debate’ yrself and poke around if need be.

    Others who may not be familiar with this analysis should know that Europeans are pretty familiar with it and use it regularly to explain political economy in a rigorous and meaningful discourse.

    http://en.wikipedia.org/wiki/Core-periphery

    A core nation, the USA, France, Japan, has the most developed economy and within the nation, it may have core, semi-periphery and periphery economic components. So while the US has Google, Intel, Genetech, Boeing, which provide leading edge, world exclusive products with high profits and long lead times for competitors to counter, the US also has coal mining, gas and oil drilling and corn syrup production, less profitable commodities that are used in core production of plastics etc. There are semi periphery countries which have moved up /to/from low profit, labor intensive textile manufacture to consumer electronics, auto and heavy machinery, countries like Korea, or even Israel and Taiwan. But the periphery, have not integrated advanced finished products, or advanced services, but have telemarketing centers or help desk along with lesser manufactured goods, such as auto components, electronic components, which are sent to semi periphery countries that are scrambling to move up the profit hierarchy by starting first with more profitable assembly consumer items. There is more low profit extraction of raw materials, low level unskilled labor employed and lower over all profits for those less developed countries. The use of these terms goes back over 30 years. It is not familiar American frame of reference, but there are those of us here who are comfortable with the model and comfortable with its power of explanation.

    It is important to recognize that the starting point of analysis with this model is not the nation state or the economy of the nation but the unit of analysis begins with the interstate political system simultaneously along with the global economic system that the individual polities all work with.

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