How Euro zone Comparative Advantage Works
Written by Hilary Barnes
Who would have thought it! The Eurozone is working beautifully as a machine for optimizing the product of labor and capital, which is what economic success and the generation of wealth and prosperity is all about.
Perhaps this is what the European Commission's top people mean when they say the Eurozone budget consolidation policies are showing signs of success?
The process, of course, involves a steady movement of capital and labor to the high productivity northern countries, Germany, the Netherlands, Austria, Finland, Denmark (de facto but not de jure a Eurozone member), with France as a borderline case, and capital and labour streaming out of the other Club Med countries as fast as it can go.
This is all nicely documented in a note by Natixis, the Paris-based investment bank.
The exploitation of intra-zone comparative advantage may be good for the Eurozone as a whole, but it has its costs. Unemployment in Spain in the first quarter went to 27.2 %; it is about the same level in Greece and near 20 % in Portugal.
The trend has been accelerated by the crash course in budget consolidation forced on the southern countries by a combination of Eurozone policy reinforced by financial market pressures (the latter have eased since the ECB introduced its OMT lender of last resort facility, and now even the southern countries find themselves enjoying super-low interest rate on government bonds).
The budget consolidation policies are in principle combined with programs of structural reforms that are intended to increase the international competitiveness of the southern countries and set them up to climb that long, high ladder leading to a paradise of wealth and prosperity equal to Germany's.
But to date, as Confinindustria, the pressure group for Italian industry and employers, has said, the policy has caused "devastating damage, comparable with war" - and the damage is even worse in Greece, Portugal and Spain.
The idea of structural reforms is all very well, but it means, among other things, raising the educational standards of those leaving school and the ratios of those obtaining a university degree to the levels of the best performers in Europe, and that will take not a year or two but a generation or two - and all made more difficult because a high proportion of the better-educated young are leaving the country in search of jobs elsewhere, especially in Germany.
Other examples of how intractable the catch-up problem would seem to be is that the southern countries (including France) spend only slightly more than half as much of R&D, as a percentage of GDP, as the northern countries, and have only half as many industrial robots.
Meanwhile, the Eurozone's doctrine of "internal devaluation" places intolerable strains on society, but there is no alternative, because as a member of the single currency zone the adjustment - reducing real wages to a level appropriate to the level of the country's productivity performance - cannot be done by an exchange rate devaluation.
Something might be done to alleviate the situation if the rich northern countries would pour money into the poor southern ones, but as things stand they do not see why they should subsidize the re-industrialization of such inefficient countries.
Indeed, as we have just seen in Cyprus, they seem to think that what is required is to destroy one of the only burgeoning industries the island had, banking and finance.
So there is, as Natixis says, a dramatic and unsolvable conflict between the rich northern countries and the poor southern ones, laying bare one more reason why it might not safe to assume that the break up of the Eurozone is impossible.