Saturday, November 20, 2010

Dermot, Dermot, Helmut, and Helmut


WARNING: CONTAINS GRATUITOUS AND JUVENILE STEREOTYPING OF OUR EUROPEAN PARTNERS

The prospective disintegration of the Eurozone highlights all the old problems with single currency areas.

For years the Euro's one-size-fits-all monetary policy set interest rates far too low for countries like Ireland and Spain, inflating monstrous property bubbles that have now exploded with such disastrous consequences.

And throughout the periphery, cheap credit financed massive consumption growth, generating totally unsustainable current account deficits. Going into the Crash, Zorba and Pedro were ramping up their consumption by 4-5% pa , producing current account deficits in excess of 10% of GDP. Dermot went absolutely bananas, jacking up his spending by a roaring 20% in just three crazy plastic-fueled years.

Meanwhile staid and steady Helmut barely increased his spending at all (up by just 0.4% pa over the 5 years pre-Crash). He kept his nose pressed firmly to the grindstone, and with peripheral Europe's consumers frantically upgrading to Mercs and BMWs, the German current account surplus ballooned to 8% of GDP (2007).

But now the music has stopped, Helmut finds himself facing a horrible HORRIBLE reality. All that money he deposited in his local bank was lent to Zorba, Pedro and Dermot to buy needless luxuries. And it now looks like the money will never ever be repaid. Even worse, he himself may need to prop up spendaholic Z, P and D for years to come.

It is surely obvious to everyone that the single currency has shackled poor industrious Helmut to a bunch of wastrel low-productivity untermenschen fellow Europeans. What a schmuck Helmut must be.

Yes, yes, we can all see that now. It's obvious.

Except...

Well, it turns out that not all Helmuts have done quite so badly out of the Euro as our Helmut.

For example, the Helmuts who produce those Mercs and Bimmers have done very well indeed. They have benefited from having a currency weighed down by inefficient free spending Zs, Ps and Ds, rather than being strapped into the ever-appreciating Deutschemark.

Because the Euro has done wonders for Germany's exporters. Since the Euro's launch back in 1999, Germany's competiveness has improved by around 10% - a huge relief after the worsening of competitiveness over the previous decade.

But in sharp contrast, the Euro has been a disaster for exporters from the PIIGS - their competiveness has worsened by over 15%. Indeed, relative to the German export powerhouse, their competiveness has worsened by more like 25% - in just 10 years.

Here's the chart (it shows relative unit labour costs, the standard measure of international competiveness; a higher figure denotes that a country's export costs have risen relative to its competitors, making the country less competitive):



So all those Helmuts who are in the export business have done pretty well out of the Euro. Whereas any exporters among the Zs Ps and Ds have been absolutely stuffed.

The picture in Ireland casts futher light on this. We posted the Irish Daily Star's yesterday, but it bears closer scrutiny:


It seems the real Irish winners from the Euro experiment were not the Dermots in the Limerick street at all (at all)*. Sure, they gorged themselves on flat screen tellies from Taiwan like the best of them, but they're now stuck in Limerick facing the the bill. No, if reports are to be believed, the real winners - the ones who made big money in the boom and have largely kept it - are the "gouger-politicians, their wanker-banker buddies and their dodgy developer chums".

Which highlights a very important point - one we have made on BOM before. When you hear people arguing for this or that economic or financial policy as being in "the national interest", you really do have to ask how they will benefit themselves? (Yes, that does include Tyler).

Because no policy is going to benefit everyone equally, and although economic theory says that the winners can be made to compensate the losers, political reality says that's rarely the case in practice.

The Euro is a classic case in point. The winners of this hare-brained experiment have been the federalism industry, German exporters, and cheap money speculators of one kind or another. The losers have been European taxpayers, and all those now living in peripheral areas that are now so uncompetitive they face years of wage cuts and falling living standards to put things right. If they ever can be.

Things would be even worse for the PIIGS if they pulled out?

Don't be daft. Even if the Germans and others do promise massive fiscal bailouts from here to eternity, shackling themselves to the Deutschemark will ensure they never ever become competitive. They will never ever stand on their own feet again.

A bit like say, the North East of England - shackled to the Pound and consigned to perpetual welfare dependency.

* Apologies for lame at all at all commentary on Ireland. Mrs T is half Irish and Tyler simply can't resist it.

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