EU Periphery: Devolving to Developing Country Status?

by Dirk Ehnts

Olivier Blanchard expresses his view on the IMF blog:

Equally, or perhaps more importantly, Greece has to reduce its current account deficit. For two separate reasons. First, no country can run a large current account deficit and borrow from the rest of the world forever. Second, as fiscal austerity cuts into domestic demand, the only way to return to growth is to rely more on foreign demand to reduce the current account deficit.

[…]

This leaves decreases in relative wages, at least until higher productivity can kick in. In countries with flexible exchange rates, this can be achieved through currency depreciation. In a country which is part of a common currency area, it has to be achieved by decreasing nominal wages and prices. In Greece, wages have increased faster than productivity growth for years, compounding the problem. Unit labor costs―which is a key measure of competitiveness―increased by over 35 percent during 2000-10, compared to just under 20 percent in the euro area. This has to be undone.

The interesting thing I want to get at here is that the inflation-targeting monetary policy of the euro zone has allowed above equilibrium – in the sense of a balanced current account – wage growth. The money to pay higher wages and support a higher price level must have come from somewhere. I remember a discussion with Marc Lavoie last summer in Berlin, which can be nicely summarized by this graph. While fixing the interest rate, the ECB did not care about where the money supply increased. Therefore, credit expansions in the periphery was ignored when alarm bells should have been ringing. And now, after the fact, we still have mostly the same people in the institutions, from governments and banks to European organizations. Nothing has been fixed in the financial markets, no change in monetary policy, and certainly no change in economic thinking on the side of the mainstream.

Of course, some parties benefited from the boom in the periphery, especially in connection to the real estate bubbles. Greece is already known to be quite corrupt, according to Athensnews.gr:

Greece’s ranking on Transparency International’s closely watched Corruption Perception Index (CPI) worsened in 2011, with the country taking joint 80th position out of 183 countries on the list, which was published on Thursday. Its ranking puts it on a par with El Salvador, Morocco, Peru and Thailand.

Then, we had the recent inquiry in Ireland. The Irish Times reports the short version of the resulting report:

3,270 pages? No, thanks. Give it to me in a paragraph.

Bertie lied. Again and again. We don’t know where £165,000 in his accounts came from. And, therefore, we can’t determine whether he received corrupt payments from developer Owen O’Callaghan.

Ouch! But there’s more to this report than Bertie Ahern, surely?

Much more. The words “corrupt” or “corruption” are used 977 times in the report. Fourteen politicians are listed as having received corrupt payments. In most cases, developers and landowners knew about the payments, even when fixers like lobbyist Frank Dunlop were doing the dirty work for them.

There is more. In Spain, the caso Guertel shows how corruption connected the real estate companies to political parties. Here is Wikipedia:

The Gürtel case is an ongoing political corruption scandal in Spain. The investigative operation was given the name Gürtel in a cryptic reference to one of the principal suspects, Francisco Correa (Correa means belt in English, Gürtel in German). Correa is a businessman who cultivated links with officers of the People’s Party (PP), Spain major right-wing party, some of which have been forced to resign or have been suspended. An investigation began in 2007 after information was obtained from a whistle-blower.^[1] The case came to public attention in early 2009.

Among the accusations are bribery, money laundering and tax evasion implicating a circle of businessmen lead by Francisco Correa and politicians belonging to the People’s Party. The alleged illicit activities related to party funding and the award of contracts by local/regional government in Valencia,^[2] the Community of Madrid and elsewhere.

Probably this is just the tip of the iceberg. However, judge Baltasar Garzon, who initiated the case, has been neutralized by his opponents. The NY Times reported under the headline A chilling verdict in Spain:

The enemies of Judge Baltasar Garzón have finally gotten their way. Spain’s Supreme Court this week found the judge guilty of misapplying the country’s wiretap law and suspended him from the courts for 11 years.

Judge Garzón has played an important role in Spain’s transition to democracy, as a scourge of corrupt politicians left and right and a powerful champion of international human rights law. His efforts to prosecute the former Chilean dictator, Gen. Augusto Pinochet, and investigate the horrors of the Spanish Civil War era, though unsuccessful, advanced the principle that there can be neither amnesty nor impunity for crimes against humanity.

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