Sentences to ponder, the eurozone crisis as political failure

Italian Prime Minister Mario Monti’s program includes no general wage cuts. In Portugal, the government abandoned attempts to engineer unit labor cost reductions through “internal devaluation” after meeting political opposition. In Ireland, the Croke Park accord prevents the government from further reducing public-sector wages. Despite nearly two years of troika programs, Greek unit labor costs have hardly budged.

That is from Peter Boone and Simon Johnson (pdf).  Here is another batch:

Once risk premiums are incorporated in debt, Greece, Ireland, Portugal, and Italy do not appear solvent. For example, with a debt/GDP ratio of 120 percent and a 500-basis-point risk premium, Italy would need to maintain a 6 percent of GDP larger primary surplus to keep its debt stock stable relative to the size of its economy. This is unlikely to be politically sustainable.

I am not suggesting that a 6 percent of gdp primary surplus is easy.  Nonetheless some countries are unwilling to do it.  One is free to take a Keynesian view of how spending cuts damage gdp in the short run.  Even then, Italy could combine an increase in private debt with wealth transfers (e.g., give creditors a mortgage share in Italian homes), but of course they don’t want to.  Today, Italy could still enjoy a living standard better than what the country had in the 1980s, when everyone was calling it so dynamic (not your grandfather’s Versailles Treaty).  That’s no longer good enough.

Critics get it wrong when they blame the euro crisis on “too much socialism.”  For one thing excess public ownership is only a secondary problem (while a problem), for another thing Sweden is doing fine.  When it comes to “failure to remedy the euro crisis,” as opposed to initial causes, let’s look long and hard at “unwillingness to consider solutions which admit that citizens’ standards of living will fall.”  That’s not socialism, but it is one pernicious form of modern interventionism and you will find it very much here in America too.

On a somewhat different note, here is a good blog post on the shortening of collateral chains, and how the ECB’s policies are hitting at some REPO markets.


I'm not sure about “unwillingness to consider solutions which admit that citizens’ standards of living will fall.” I think it's fairly standard political cowardice in the face of ratcheting down living standards with the cudgel of nominal wage cuts. If politicians had access to a more switchblade solution--namely, massive devaluation--they'd be all over it.

European citizenry circa 1997: Why should we join the Euro?
Euro elites: Because your standard of living will rise
Euro elites circa 2012: oops, we lied. Now your standard of living will need to fall to stay in the Euro.
Citizenry: But that then negates the only point you ever made in favor of us joining the Euro.
Elites: It's not supposed to be good, it's supposed to be bought.

It sounds like Lowi's socialism for the organized (i.e., guaranteed wages and benefits through union contracts, medicare, etc.) and capitalism for the unorganized (i.e., you face the full brunt of the market readjusting).

guaranteed wages... aren't. All it does is push the risk in to the tail.

Tail risk can usually be ignored. :^)

Until it can't and KABOOM.

Dear Tim Kaine:

If you promise to shut down all support to George Mason university, and remove all employees from getting state employment benefits, I will vote for you.

Thank you.

A concerned Austrian.

How is an Austrian going to be able to vote for the governor of Virginia?

Dead people seem to manage it, so I don't see how a foreigner wouldn't.

Tim Kaine isn't running for governor. He's running for the Senate seat being vacated by Jim Webb.

I'm pretty sure Austrians can't vote for Senators either.

I'm pretty sure you don'

I'm pretty sure you don't know what he means by Austrian.

Excuse the double post.

Citing Sweden "doing fine" as contraevidence to "too much socialism" being the problem seems at odds with what I have been reading recently about Sweden. Just as one example, from

"During the next 15 years (1993-2008) Sweden went through an extraordinary financial cleansing, cutting public expenditure from 71 percent of GDP in 1993 to 52 percent in 2008 (that is, by almost one-fifth of GDP), while cutting public revenues by only 6 percent of GDP."

Might that not have something to do with how well Sweden is doing?

Or, it could be their taxing system.

You have to factor a smaller, more homogenous country into it as well.

Correlation or causation? (I think it is too often a "get out of jail free" defense against successful Nordic policies.)

Maybe both? It can't hurt to have an easier internal dialogue and a culture all pulling together in a similar direction.

Maybe both? It can't hurt to have an easier internal dialogue and a culture of people pulling in a similar direction.

Whoops, sorry about the (sort of) double post.

(Since the depth is at max, replying to msgkings here) But isn't it curious that diversity is presented as a reason not to try the same path. That is, it is cited by people who would think up another gotcha, if they had to.

Portugal is small and homogenous too. In fact they should be more cost-competitive than Sweden as they don't have to spend nearly as much on heating in winter.

The real problem in Club Med is entrenched rent-seekers. All these countries offer overpaid, over-secure jobs to public-sector workers, of whom there are a great many. On top of that there are unions in favored industries with their own generous working conditions. The housing market also mitigates against labor mobility (merely trying to rent an apartment in the PIGS is a bureaucratic nightmare). The young who are locked out of cushy jobs have to scrape by on short-term contracts, underpaid and overtaxed. Just as with unions in the US, public-sector and private-sector unions in the PIGS are a powerful political force. The only way these countries can grow is if the rent-seekers are cut back.


Easier said than done...

Yep. Social capital is very difficult to generate.

Sweden is smaller than Greece now?

How about Greece hosted an Olympics, how about the EU is too loose, which is exactly what our founding fathers learned with the Articles of Confederation and the Confederacy.

You mean the way they foolishly let South Carolina in?

Exactly, they repositioned themselves on the Rahn curve.

Well, in Portugal at least the government did in fact reduce labor costs by increasing the amount of work hours per day, by getting rid of 4 holidays (2 "public" and 2 religious) among other things. What the government didn`t do was lower the taxation to the social security fund that the Troika asked for.

In Ireland, public sector pay was reduced by about 10% through a special tax, public sector employment is being reduced, deficit reduction is proceeding as quickly as possible given that (thanks to the former government and current ECB) we're still paying off failed bank bonds, and of course all the microeconomic reforms have been done in the 80s and 90s.

The headline figures in the post are misleading: I suspect for other Euro-periphery states too.

If you hadn't of bailed out the banks...

Monti recognizes that part of the problem is Italy's notorious tax evasion and off the radar hidden economy, and has undertaken to limit cash payments among individuals for payments for goods and services of over a certain amount. Let's see if Monti can tax the hidden economy before we say that all hope is lost. Monti is also improving efficiency by reducing barriers to entry into professions and by increasing competition in the media and other industries. There's a lot of protectionist inefficiency that could be gone after, as well as lost tax revenue.

The only way to tax the hidden economy is to make it cheaper to operate above board than hidden. This means lowering tax rates and reducing regulatory burden.


Let's work this out as a math problem.

If you are a participant in the hidden economy, you pay 0 taxes.

Any number above 0, is a loss to you compared to your current position.

On the otherhand, compulsion and detection increase your costs if you seek to evade.

Now, tell me honestly, which do you think will work: compulsion and detection or something above 0 without detection and compulsion.

They are already using compulsion and detection, are they not?

What Monti is saying is that he'll do noticeably better at compusion and detection than any of his predecessors have, which frankly doesn't seem plausible.

They just started detection. Compulsion, ie, the law, was always there.

throughout the 1990's Russia was freely criticized by outsiders as having no tax enforcement. The outsiders were wrong.

There are huge costs to working below the table due to search costs, missed advertising opportunities etc. This is actually something that Dr Soto has looked into quite a bit.

The problem of Italy is that it isn't taxed enough? So Italy is actually thriving, only the state has problems? Really?

andy, You can have lower rates if there is compliance.

And vice-versa. You can have compliance if there are lower rates.

...let’s look long and hard at “unwillingness to consider solutions which admit that citizens’ standards of living will fall.” That’s not socialism...

It's not?

Technically, "socialism" is about public control of production. The "welfare state" is about public provision of consumption goods. In popular political discourse the two concepts are conflated or used interchangeably to criticize Europe for "too much socialism" or "too much welfare state." So yes, Boone undid his whole argument there and the "critics" he is lecturing are right.

"Unwillingness to admit that living standards will fall" = unwillingness to admit the (Mediterranean) welfare state must be dismantled.

Technically, “socialism” is about public control of production.

I'm aware of the 19th century definition used by socialism's proponents...

Ah, so we're saying now that getting rid of Berlusconi won't magically change everything about Italy? That he was a symptom as much as a cause?

"For one thing excess public ownership is only a secondary problem (while a problem), for another thing Sweden is doing fine. "

Sweden is more capitalist than most of Europe (including France).

To cite a popular meme round these parts, GOP economics isn't about capitalism.

Sweden is more capitalist than most of Europe (including France).

Most people mentally categorize Sweden as perma-socialist due to how sexually attractive Swedish people are. (That's my theory anyway.)

Socialism makes you hot?

Didn't work so well for Mao or Stalin or Khruschev or....

I guess Che Guevara made it work.

Nancy Pelosi not so much.

Russian girls? Chinese girls? Cuban girls? I'm not seeing a flaw in this theory yet.

It's a relic of the 1980s I think. IIRC they reduced gov't share of GDP from something like 70% to 50% between 1990 and 2010.

Oh, haha, I just saw that cite above.

"When it comes to 'failure to remedy the euro crisis,' as opposed to initial causes, let’s look long and hard at 'unwillingness to consider solutions which admit that citizens’ standards of living will fall.' "

Isn't this the same mechanism we rely upon so that politicians don't game the system for the cronies to such an extent that standards of living fall precipitously? If maintain a primary 6 percent surplus were possible, then these countries wouldn't be very democratic. I wish the economists would just ..... already about what 'needs' to happen and thinking about what is likely to happen politically. Building institutions that economists think will work is really another exercise in rational constructivism. That really never ends well - see CDOs, MBS, Washington Consensus, etc. The list continues. If this crisis hasn't stripped economists of their perceived authority, god help us.

"Modern Interventionism"? is that code for democracy?

Let the bond holders eat printed euros.

>Sweden is doing fine.

Haven't been to Malmo recently, have you?

I visit Malmö a few times every year, and those visits give me no other impression of life in Sweden than one that is entirely compatible with what must be taken as a statement on the situation of the swedish economy, "Sweden is doing fine".

"I am not suggesting that a 6 percent of gdp primary surplus is easy. Nonetheless some countries are unwilling to do it. One is free to take a Keynesian view of how spending cuts damage gdp in the short run. Even then, Italy could combine an increase in private debt with wealth transfers (e.g., give creditors a mortgage share in Italian homes), but of course they don’t want to."

So the answer to government debt is to drain non-government at a rate of 6% of gdp, funded by a corresponding increase in private debt. That'll be sustainable right up until it ends in revolution.

Government overspending ends in fire.

Yes, but at least you have a ready source of fuel for the fire. Wheel barrow loads of devalued currency.

Tax cuts when we have surpluses ends in fire.


Tim Kaine has not been governor of Virginia for several years now. He is running for the US Senate. His successor is from the other party.

I find it amusing that Tyler continues to link to scare stories about Europe that may not be justified or that contain silly stuff. Regarding silly stuff, the idea that not demanding nominal wage cuts reveals "political failure" is just nonsense. Nominal downward stickiness of wages is nearly universal and no politician would survive by seriously demanding them. These guys are demanding substantial fiscal austerity, which is politically damaging to them enough (watch the falling governments!), without indulging in something nearly impossible.

Also, as for Italy, the spread there has not been at the 500 bp level for months. Just went up to 420. Why do we see these sorts of projections out of touch with reality?

Hmmm ... When it comes to “failure to remedy the euro crisis,” as opposed to initial causes, let’s look long and hard at “unwillingness to consider solutions which admit that citizens’ standards of living will fall.”

This sounds to me as if the solutions are something imposed on the citizens. In a democracy, even the lazy, gullible and ignorant get a vote so probably an imposed solution is necessary. Necessity being the argument of tyrants, I hope Tyler will warn us who is to do the imposing.

But Sweden isn't all that socialist. They're among the most free market oriented countries in continental Europe. On the other hand I don't think it would be unfair to characterize Greece as a mostly planned economy. Yes Sweden's public sector as % of GDP is bigger.

How is this possible? The Greeks regulate everything. When they tax, they tax the wrong things. Special interest groups have pretty much all the effective power in the country. And the government bureaucracy simply doesn't work. Things that in Sweden are done with a few clicks over the internet, in Greece take paperwork that needs to be retrieved in one office and delivered at another, someone to catalogue the papers, someone to digitize them, etc. The vast majority of what the state does in Greece is not just zero productivity work, it's negative productivity.

I don't think the most hardcore of Keynesians could argue that on average the fiscal multiplier in Greece isn't negative.

Why would any conservative want to reduce the debt to GDP ratio? Greenspan argued against it based on the demand for safe government debt. Conservatives say tax cuts are always beneficial, and higher debt and deficits are never a problem - see the history of the Reagan economy for proof. And no conservatives made any big deal about the every increasing debt and deficits from 2001 to 2007 when Republicans converted a very small deficit into a huge deficit and rapidly growing debt to GDP ratio.

The only time conservatives argue against increasing the debt to GDP ratio is when the economy drives the need for increased government spending in one form or another for things that don't benefit the rich who fund the conservative think tanks. Increased government spending on useless weapons and pointless military is good; helping the poor survive is bad.

Ron Paul is a big problem because he argues for less government spending on everything, including the big government deficit spending on war related activity and assets, especially those assets that are completely useless but incredibly expensive. In every war, the weapons that were needed to fight the wars to conclusion were developed, manufactured, and deployed entirely after the war began, so all the spending before the war is certain to be wasted spending on weapons with no utility.

"Conservatives say tax cuts are always beneficial, and higher debt and deficits are never a problem"

Wow, straw man.

"Wow, straw man."


Its true. When a Republican administration cuts taxes and increases a deficit, its never a problem because of magic of capitalism. Obviously when a black man does it and the benefits dont instantly accrue to capital owners or defense contractors then its the end of the world. Silly mulp, you are so wrong!

Wow, accusations of racism.
These tropes are getting boring.

You're always boring.

Name, don't feed the trolls.

If Obama's numbers were anywhere near Bush' he would be getting a Nobel Prize in Economics.

Well if you are going to go by precedent, Obama should have been awarded a Nobel Prize in Economics before he took office. ;)

"“unwillingness to consider solutions which admit that citizens’ standards of living will fall.” That’s not socialism, but it is one pernicious form of modern interventionism and you will find it very much here in America too."

I don't understand what Tyler means. Median household income (in real terms) over the last 40 years has been essentially flat (I will go out on a limb and say that once September 2014 comes around we will see that 2013 = or < 1973). Real wages for white males are lower in 2012 than in 1973. Wages for women and minorities have simply caught up (although there is a still a long way to go). Real median incomes for full time working males between 25 and 34 with a bachelors degree since 2000 have fallen by approximately 20%.

Living standards have already fallen. On top of that GDP per capita is approximately 88% higher than it was in 1973. That increase has mostly gone to the very top (1% and 0.1%). We do have the GDP, it's just that growth of GDP does not benefit the bast majority of people. Is Tyler saying that we need an even higher gini coefficient - that the bottom 99% should get even less and the top 1% get even more?

So for the life I me I am baffled by statements such as "unwillingness to consider solutions which admit that citizens’ standards of living will fall". Will someone please explain this to me (and I mean that straightforwardly and respectfully).

I think Cowen is aware of the wage statistics you're citing. Your mistake is believing that wages = standard of living.

OECD ( says: In Greece, over the period 2000-2010, real average annual wages increased by 13%. In the US over the same 10 year period, real average annual wages increased by 5%. (I would be happy to use medians and if I did increases would indeed be smaller, but the OECD statistics page doesn't give median data.) So in the US incomes have not fallen (although you can get a fall if you pick the right sub-demographic, e.g. median white high-school-educated males), and in Greece they have increased substantially. In both countries non-wage compensation has increased even more, primarily via public and job-linked health care spending in the US, and via public health care and infrastructure spending in Greece.

In the US people have screamed bloody murder over "cuts" even as real per capita government spending has increased slightly in every single year of the recession ( In Greece, cuts have been real, but have come nowhere close to erasing the last decade of debt-fueled increases in living standards. And the Greek government, even the new technocratic government, is avoiding following through on the privitizations and labor market liberalizations it had agreed to.

Those don't look like societies that are ready to accept that their living standards are going down. They look like societies that can barely accept that their living standards won't grow as fast as they used to.

Wages have been flat, but purchasing power has increased, so living standards have improved since 1970. CPI doesn't do a great job of measuring productivity gains.

By and large the top 1% and .1% of today were the 99% and 99.9% of 1973. It's also been shown that most of the income gain since then is the result of additional hours worked, which seems meritocratic enough.

If the 99% aren't improving their productivity but the top 1% are (to the benefit of the 99%, incidentally, both in terms of their contribution and the massive tax burden they shoulder) is that something to rail against and demand coercive measures to correct, or is that just how the distribution naturally falls out? Who says that the laws of the universe must hew to human senses of what's fair?

I think what Tyler means is policies that deliberately envision falling standards of living, as opposed to supporting them with reckless accumulation of debt.

Would you prefer your current income in 2012 or double your income in real terms 40 years ago?

The answer is obvious, as is the gaping flaw in your analysis.

Do I get to decrease my wife's spending to standard 1971 levels?

When looking at compensation in Southern Europe, one has to realize that the labor market is in no way homogeneous. Spain, for instance, has, at the same time, high ULC, high unemployment, and extremely low salaries for many jobs that require quite a bit of education. One needs to put together quite an unhealthy market for all those things to come together at once. Age creates a very large divide in salary and job security, while neither of those two have all that much to do with worker productivity. Tie to that the lack of effort in career that you can find in your typical Spanish employer, and you get very few productivity gains compared to anyone else.

People talk about internal devaluation. But in a market like that, won't internal devaluation just lead to migration of young workers to countries that provide better opportunities? Why take a job requiring a college degree that pays a thousand euros in Spain, when the same job pays almost triple that in Germany or the UK? Then population ages even more quickly, and demographics become unsustainable.

Young people SHOULD go to countries with more opportunities. That's supposed to be a big reason for the Eurozone to work, technically labor is as mobile there as in the US. The problem is Spain and Germany as far more different than New York and North Dakota.

"are far more" not "as"

I don't know if it was here or somewhere else, but I was shocked to see how much worse private debt is in Europe. They are apparently in much worse shape than we are. Their total debt ratios are really scary.

As several commentators have commented Sweden is the opposite of "too much socialism" in Europe.

- Both Sweden and Denmark is top 10 in Heritage economic freedom index in Europe, 21st in the world.
- Marginal tax rates and public spending / gdp especially have nosedived last 15 years

More more importantly, during the crisis:

- Sweden executed anti-keynesian policies, structurally never entering defecit, in absolute terms were in surplus already in 2010. Aiming at halving debt/gdp within few years.
- They performed somewhat internal devaluations, primarily through "solidarity" settlements with the major unions

The current government has reduced top marginal tax rate every year. If this continues much longer Sweden will become one of the most free economies in the world. HARDLY SOCIALIST TYLER!

Sweden ranks higher than the U.S. in all but three of the categories of economic freedom in Heritage foundations index. Those three categories are labour, taxes and goverment spending. But then again, in goverment spending Sweden gets 8.8 points out of 100 (U.S. 46,7) ranking last and well below the 50 point line that demarcates the repressed from the mostly unfree. Fitting, since Sweden in this category has ranked below both Cuba and China in all available years.

'Fitting, since Sweden in this category has ranked below both Cuba and China in all available years.'
And look at what a socialist hell hole Sweden is. Or not, as anyone who actually has visited Sweden knows.

Are you implying that the goverment spending category of Heritage Foundations index does not correspond to a meaningful definition of the economical freedom of the citizens of China (84,1 = free), Sweden (8,8 = repressed) and the United States (46,7 = repressed, but close to mostly unfree)?

Or do you maybe simply not value economic freedom when you categorise countries as hell holes or not?

OTOH, they reduced that from 70% to 50%.

They're much better off than, say, France, which is poorer than every U.S. state.

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