Christian Thimann currently works with the French investment bank AXA while also holding an academic position at the Paris School of Economics. However, from 2008 to 2013 he was Director General and Adviser to the President at the European Central Bank, which makes his views on the economics and politics of the euro crisis especially worth considering. He lays out his perspective in
\”The Microeconomic Dimensions of the Eurozone Crisis and Why European Politics Cannot Solve Them,\” which appears in the Summer 2015 issue of the Journal of Economic Perspectives. Like all JEP articles, it is freely available online courtesy of the American Economic Association. (Full disclosure: I\’ve worked as Managing Editor of JEP since the first issue of the journal in 1987.)
On the economics of the eurozone, Thimann argues that the problems have microeconomic roots, not just macroeconomic ones. Here are a couple of intriguing figures. Thimann points out that since the inception of the euro, some economies have consistently run trade surpluses, while others have consistently run trade deficits. This figure shows the cumulative trade surpluses and deficits over time. What\’s especially interesting to me is the relative steadiness of these lines: countries with trade surpluses tend to add surpluses every year, countries with deficits tend to add deficits every year.
Thimann argues that a driving factor behind these trade imbalances arises out of the interaction between wages and productivity. If wages in a country are growing a lot faster than productivity, then in effect, the cost of producing in that country is rising and it will be harder for that country to sell in international markets. If two countries share the same currency, so that exchange rate adjustments are not possible, then a country where wages are growing much faster than productivity will be at a competitive disadvantage compared with countries where wage growth is more closely aligned with productivity growth. Thimann points out that in the the trade deficit countries, compensation soared well above productivity growth almost as soon as the euro was in place.
Why is Greece not shown among the countries here? Thimann writes in the note under the table: \”Greece is not shown in the chart because, while the productivity increase is broadly comparable to that of Portugal, the wage growth was even steeper, rising by 2008 to 180 percent of the 1998 value, hence exceeding the scale of the countries shown; wages have declined by about 20 percent since the crisis to 160 percent.\”
Why did wages rise so quickly in the trade deficit countries? Some countries saw real estate bubbles or surges in government borrowing that pushed up wages in a way that productivity growth could not sustain. Public-sector wages took off: \”Over the first ten years of the euro, public wages grew by 40 percent in the eurozone as a whole and by 30 percent in Germany. But public sector wages rose by 50 percent in France, 60 percent in Italy, 80 percent in Spain, 110 percent in Greece, and 120 percent in Ireland.\” A common justification given for the rapid wage increases was that price levels in many of the trade deficit countries were rising, often at 6-7% per year, and so there was a perceived need for wages to keep up. But for the purposes of international trade and competitiveness, what matters is the wage–not the rise in local-country prices.
Thimann goes into some detail about how the trade deficit countries in the eurozone also tended to impose rules and regulations leading to higher wages and restrictions on business. My favorite story of the heavy hand of regulation in Greece is one that Megan Green told on her blog back in 2012 , but I\’ve been telling it ever since. It\’s about finding yourself in a combination bookstore/coffee shop in Athens which, because of regulations, is not allowed at that time to sell books or coffee. Green writes:
This is best encapsulated in an anecdote from my visit to Athens. A friend and I met up at a new bookstore and café in the centre of town, which has only been open for a month. The establishment is in the center of an area filled with bars, and the owner decided the neighborhood could use a place for people to convene and talk without having to drink alcohol and listen to loud music. After we sat down, we asked the waitress for a coffee. She thanked us for our order and immediately turned and walked out the front door. My friend explained that the owner of the bookstore/café couldn’t get a license to provide coffee. She had tried to just buy a coffee machine and give the coffee away for free, thinking that lingering patrons would boost book sales. However, giving away coffee was illegal as well. Instead, the owner had to strike a deal with a bar across the street, whereby they make the coffee and the waitress spends all day shuttling between the bar and the bookstore/café. My friend also explained to me that books could not be purchased at the bookstore, as it was after 18h and it is illegal to sell books in Greece beyond that hour. I was in a bookstore/café that could neither sell books nor make coffee.
One story like this is a comedy. An economy in which stories like this are commonplace–and which is locked into a free-trade zone with countries sharing a common currency, is a tragedy waiting to happen.
On the politics of the eurozone, Thimann argues that the euro, the European Central Bank, and all the European-wide negotations over debt overshadowing these other issues. Normally, when a democratic country has miserable economic performance with high unemployment and slow growth, a common response is for its citizens to demand some policy changes from their politicians. But in the euro-zone, when a country has a miserable economic performance, the politicians of that country tell the citizens that it\’s not their fault. It\’s all the fault of the Euro-crats in Brussels, or Germans pulling strings behind the scenes, or the ECB. The politicians tell the voters that self-examination unnecessary and even counterproductive, because they to unite against the malign outsiders.
Here are some concluding thoughts from Thimann:
At the core of the economic crisis in the eurozone is the problem of unemployment in several countries. Roughly 18.2 million people are unemployed in early 2015. In about half the eurozone countries, the unemployment rate is below 10 percent, and in Germany it is actually below 5 percent (Eurostat data, February 2015), but in France, 10.7 percent of the labor force are unemployed; in Italy, 12.7 percent; in Portugal, 14.1 percent; in Spain, 23.2 percent; and in Greece, 26.0 percent. …
It is legitimate to speak about this as a problem for the eurozone in the sense that economic policies in a single currency area are truly a matter of common concern, and also because high unemployment interferes with the smooth functioning of the eurozone, challenging its economic and political cohesion. But it is not accurate to attribute responsibility for the problem, or the solution, to the eurozone as a whole, to European institutions, or to other countries. Jobs fail to be created in a number of these countries not because of a “lack of demand” as often claimed, but mainly because wage costs are high relative to productivity, social insurance and tax burdens are heavy, and the business environment is excessively burdensome. All of this should be viewed not in absolute terms, but in relative terms, compared with other economies in Europe and countries around the world where labor costs and productivity are more advantageous, and the business environment is friendlier.
“Europe” is not an all-powerful actor in the field of national economic policies, but only a potentially useful facilitator. Only the country concerned is the legitimate and able party to improve its own economic functioning in line with its social preferences and economic setup. This is why European politics cannot solve the microeconomic dimensions of the eurozone crisis. Within individual countries, it is the governments, administrative authorities, social partners, and all other economic stakeholders that are the legitimate actors in the field of economic and social policies….
For the eurozone countries, their economic and unemployment problems are not primarily a question about some countries versus other countries within the monetary union, but about finding their place in an open global economy—that is, about competing and cooperating successfully with advanced, emerging, and developing economies across the globe. An inward-looking European debate on the distribution of the relative adjustment burden for structural reforms would dramatically overlook the much broader challenges of integration into the global economy. … It may be more glamorous to focus on European monetary policy, the “European architecture,” or the “bigger macro picture.” But the real issue of—and solution to—the crisis in the eurozone lies in the mostly microeconomic trenches of national economic, social, and structural policies.
I think Thimann may understate the fundamental macroeconomic problems that are being created by the presence of the euro (as I\’ve discussed here and here, for example). But he seems to me quite correct to emphasize that many European countries badly need structural, regulatory, and microeconomic adjustments. Moreover, politicians and voters in many of these countries would much rather assail the rest of Europe about international negotiations involving public debt and the euro, rather than face their domestic political issues.