Is the future of the European periphery a bright one?

by on August 4, 2011 at 7:17 am in Current Affairs, Economics | Permalink

Hugo, a loyal MR reader, asks:

…based on this sentence: “I am pessimistic about the survival of the full eurozone, which is not the same as being pessimistic about Europe”

What’s the non-pessimistic, post-Eurozone scenario?

Wouldn’t that leave Greece and Portugal and maybe a couple of others as the Euro equivalent of the US Rust Belt, but with no federal support & much-reduced ability for people in those countries to migrate to areas where there is job growth?

Greece has made very good progress on cutting spending and limiting patronage (where is the Cato study?), although the whole package probably can’t work in such a deflationary environment, not to mention the riots in the streets.  They’ll probably have to give back at least a third of what they have done on the reform side, but a lot of inefficiency has been rooted out for good.  The country doesn’t have to have a miserable future, just look at recent Turkish growth.  Of course Greece needs to default (again, and less selectively) and that will require in the short run yet more spending austerity because the borrowing still is financing their current budget.

Portugal made significant economic gains before joining the eurozone.  Its manufacturing probably won’t come back but old people like the place and that will continue to help them as Europe ages.  They can sell real estate and vacations and produce services and a bit of agriculture.  Neither Greece nor Portugal faces much risk from Chinese or Asian competition; those “Rustbelt” problems lie largely in the past and have already hit them and been absorbed.

EU subsidies are not the path to wealth and in part they lock those economies into low-productivity growth ag. sectors; that’s a mixed blessing.  And who says a eurozone implosion would cause those subsidies to go away?  Northern Europe already has allocated that money and perhaps wishes to retain influence over their neighbors, maybe all the more in a volatile environment.

Portugal is not reaping major gains from the right of its citizens to migrate to Germany and besides maybe that won’t go away.  Schengen could fail and Germany still might prefer Portuguese immigrants to the relevant alternatives.

Currency depreciations of 40 percent or more won’t hurt Portugal or Greece!

By no means am I an extreme optimist about these countries, but I think they will do OK, at least once they get past the short run.  Why shouldn’t they?  Human capital levels are not superlative but they are entirely acceptable for mid-level European existence and the climate is superb in both places.  All they have to do is wave a magic wand and imagine themselves outside the eurozone, and outside their current fiscal shortfalls, just don’t ask me how they get there.

1 Joe August 4, 2011 at 8:18 am

How do you know whether or not he is a loyal reader? Too many assumptions.

2 Gunnar Tveiten August 4, 2011 at 8:37 am

“I think they will do OK, (…) Why shouldn’t they? (…) climate is superb (…) All they have to do is wave a magic wand (…) just don’t ask me how (…)”

Is this supposed to be an argument ? They’ve got a decent climate and a population which is not-entirely-uneducated therefore they’ll be okay ? That’s it ?

3 Rahul August 4, 2011 at 9:55 am

My thoughts too. Which western countries would that generic argument not apply to?

Also is weather that relevant really?

4 Tracy W August 4, 2011 at 10:24 am

Well, this is a bit circular, as the Western countries are generally defined as the ones that are doing pretty okay in terms of GDP per capita (the definition of West I’m used to covers Western Europe, the US/Canada, Australia, NZ, Japan, it’s a group that is only really similar in being prosperous). So, it’s unsurprising that this generic argument about prosperity would apply to nearly all Western countries. Prosperous countries look like prosperous countries, surprise, surprise.

That said, Greece and Portugal have nicer climates than say the UK.

Weather is relevant in that it creates an incentive for people to holiday there and retire there.

5 doctorpat August 4, 2011 at 10:48 pm

I believe the relevance was that have nice weather and being pleasant, while being next door to France, Germany and the UK, is a major natural resource that leads to all sorts of industries such as tourism and retirement locations.
These are not resources that can be matched by China or India. Even if some third world can offer nice locations, they will still be far from home for the Northern Europeans.

6 Tracy W August 4, 2011 at 10:18 am

Did you read the whole post? Tyler observes that Portugal made economic progress before joining the eurozone, and argues that Greece has made decent progress in reforming. You’re only quoting from the summary.

The magic wand reference is to somehow getting out of the eurozone. Tyler’s done other posts pointing out the serious practical problems in accomplishing that trick.

7 Andrew' August 4, 2011 at 11:48 am

“Which western countries would that generic argument not apply to?”

Oh wait, you said Western.

8 mjw149 August 5, 2011 at 11:18 am

It’s basically a regression to the mean argument. No crisis lasts forever. There are people there that work (sometimes) buy things (usually), reproduce, etc. Of course it will work itself out.

But what will the EU’s eventual response be? A couple years from now, when they consider that they need a substantially different union, either in membership or in structure?

9 Bill August 4, 2011 at 9:29 am

Re: “Human capital levels are not superlative but they are entirely acceptable for mid-level European existence and the climate is superb in both places.”

That comment presumes that they will be able to maintain their social welfare system that supports the “entirely acceptable…mid-level European existence.” . If they don’t have income, they won’t have state services which are ultimately paid from that income).

Changing the income variable changes other variables, including those that support the acceptable mid-level European existence.

10 RZ0 August 4, 2011 at 10:11 am

Just to point out that the Rust Belt is not the heavily subsidized region in the U.S. It’s the Southeast.

11 tadhgin August 4, 2011 at 10:17 am

Schengen is not the same as the free movement of people in the EU. So for example Ireland and UK are not in Schengen, but are in the EU. Norway and Switzerland are not in the EU but are part of Schengen.

For free movement of people to disapper the EU itself woulld have to break up. Nobody I kn ow is predicting that (though it might not be a very nice place post Eurozone breakup)

12 jk August 4, 2011 at 10:30 am

The whole inter-EU migration is odd since many people get homesick in Europe if they move 2 hours away from their homeplace (that whole growing up in the same area all of their lives thing with 3 generations) and the unofficial second language is English not German (where the jobs are currently).

13 DC August 4, 2011 at 11:14 am

The “how they get there” seems to be the criticial question. Is possible, in a democracy, to leave a currency zone like the euro? If there was even talk of it at a serious level among Greek or Portuguese politicians, it’d certainly cause a currency crisis and ensuing bank runs as capital rushes out of the country. While the eurozone seems at this juncture to be a foolish idea, it seems that it may be an irreversible one as well.

14 Yancey Ward August 4, 2011 at 11:20 am

What’s to prevent these countries from unreforming once they leave the Euro and can again fund their government’s overspending by printing their own currencies? Their problems are cultural, and thus deep. I doubt any of the reforms taken are really permanent.

15 Bill August 4, 2011 at 11:48 am

What’s the difference from the following:

1. Country was in the EU and denominates debts in Euros. Banks knew of the countries fiscal condition (public budgets are not secrets, you know). Banks nevertheless lend to country (buy their bonds) at low interest rates in Euros. Bank later takes a hit when the risk they assumed wouldn’t happen, materializes.


2. Country now does not denominate its currency in Euros. Banks know of the countries fiscal conditions (public budgets are not secrets, you know). Banks nevertheless lend to the country (buy their bonds) at low interest rates in Euros. Bank later takes a hit when the risk they assumed wouldn’t happen, materializes.

The thing that is common to both is that the bank made a bad judgement based on their risk assessment, which was probably due to excess liquidity and the need to find a home that had somewhat higher interest rates than less riskless investment in their home country. I don’t see what changes. Banks will always seek a higher rate and rationalize that there is less risk than there is.

16 Frank Youell August 4, 2011 at 11:32 am

“The country doesn’t have to have a miserable future, just look at recent Turkish growth.”

Turkey will almost certainly crash in the relatively near future. The current account deficit is way past the “fire bell ringing in the night stage”. See

As everyone should understand by now, debt and deficit driven growth ends badly…

See Greece. See Spain (private sector). See the USA.

17 unblinkered August 5, 2011 at 3:01 am

See the USA…. a psychic sentence… because this hasn’t concluded yet, if it will.

18 Frank Youell August 5, 2011 at 3:31 pm


Apparently you slept through the late 2008 crash. Disastrous debt bubbles don’t have to be in the public sector. Public finance was quite stable in the U.S. in the 1920s. Private finance was a catastrophe waiting to happen. In 1929 it did. See for a chart of total U.S. debt.

19 jk August 5, 2011 at 1:58 am

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