Who gained the most from the euro?

Looking at the growth of real incomes over the first few years of the Euro’s existence, it is hard to argue against the idea that the peripheral countries should be taking more pain now. Core countries have had to accept a decline in real living standards, and it seems unrealistic to expect them to finance an increase in living standards for others.

Here is much more.  I don’t agree with all of their methods of assessment, but the piece makes some important (and valid) points.

For all the talk about how much German has benefited from the euro, we learn:

What Donovan and co found is that the lowest-income sections of the more “core” countries saw negative real disposable income growth, while those at the other end of the income scale saw incomes rise still further. In other words, in the core countries, the rich got richer, the poor got poorer.

In other contexts, this pattern is not usually considered a benefit at all.  Brad Plumer adds comment, as does Angus.


"In other words, in the core countries, the rich got richer, the poor got poorer."
How was this not expected?

More likely : "In the core countries, the rich got poorer and the poor got even more intensely poor"

Funnily, in France the rich got richer, the poor got poorer and screw the middle. Wonder what policy interventions led to a bi-modal distribution like that!

Rahul, using income decile-specific inflation rates is not standard. Not to say it's the wrong thing to do but you'd want to see the more standard approach (one deflator for each country) too. Personally, I think the inflation adjustment could be important for their question of who benefited from the Euro. The monetary union meant that for some countries' interest rates were too low (for a country's conditions) and thus inflation was probably too high (and vice versa). The nominal income growth chart would be good to see too. Also is it really surprising that the peripherals experienced higher growth? Few were predicting the Euro crisis in 2000, but I bet many would have expected higher growth in the periphery given their lower base.

Sorry, that was supposed to be below after Rahul's response to Detlef.

“In other words, in the core countries, the rich got richer, the poor got poorer.”

That claim is not supported by the facts presented in this article.
- Only the Netherlands and Belgium fit that description. In these countries, the top did gain, and the bottom did lose.
- In Germany, ALL income groups lost. The top decile lost more than the rest.
- In Austria, ALL income groups lost heavily (though admittedly the top decile lost less than the others).
- In France (if you consider her as "core") the middle lost while the top AND the bottom gained (and the bottom gained more than the top).
- In Finland ALL income groups gained.

Whoever tried to interpret that graph was seriously biased in the assessment. The one country that does really lead the hard line approach is not Germany, but Finland. They have demanded guarantees from Greece as well as threatened to leave the Euro if too much is expected of them.

While Germany has seen a decline in the value of its money, there is nothing at all that say that it is a bad thing for them. Their amazing export to import ratio is what keeps that country in its top place in the Euro. Seems a small price to pay for achieving what they failed to do in two world wars.

I'd also like to direct your attention to Italy which is the scariest of all. That is the one country which really is too big to save. Spain has already more or less been bailed out, but Italy can't be.

While that single graph is not all of the story, it would pay to take a look at what it really means before drawing your conclusions.

"While Germany has seen a decline in the value of its money, there is nothing at all that say that it is a bad thing for them. Their amazing export to import ratio is what keeps that country in its top place in the Euro."

In fact, this is why the Eurozone was created, no? Or at least, the main motivation behind Germany's participation, since their exports were getting too expensive for consumers in their nearby trading partners, and German fear of inflation made devaluating the DMark unacceptable. And so purchasing power in the periphery has increased enough to buy German products, fueling German prosperity. This study implies the Euro is a failure because it is having precisely the economic effects predicted. That's nonsensical.

The Irish one is strange. Its not what I would have imagined at all.

The study begins in 2000. By 2000, Irish incomes had already "converged". Irish GNI per capita (PPP) was slightly below the EU big four, above Spain and far above Portugal/Greece. This measure accounts for two unusual Irish features: large repatriated profits from multinational corporations to residents of other countries, and high price levels.

In other words, Greece/Portugal/Spain is a story about economic development and convergence, not the euro. Germany/Ireland/Belgium is a story about increasing returns to education.

Austria is a story about a small country choosing wage moderation in return for insanely low unemployment.

Of course, the study ends in 2010. Greece has regressed significantly

The Finns have done well.

As for poor old Ireland, it would make a (heartless) cat laugh. Before independence the nationalist politicians told the population that they'd become rich because they'd been subsidising Britain. After independence the population learned, alas, that the subsidy had been flowing the other way. So, after a couple of generations of being a backward, shabby little dump, by dint of EU subsidy, some well-chosen policies of their own, and the efforts of the population, they join the first world. Hurray! Prosperity at last! Well done, them! But then then their politicians persuaded them to give up part of their independence by joining the Euro, on the promise that it'd make them all even richer. And when the crisis came, those politicians proved themselves possibly the direst in the first world, just unutterably effing awful. God has a cruel sense of humour.

" Before independence the nationalist politicians told the population that they’d become rich because they’d been subsidising Britain. "

This claim makes me think that you know little about that which you address.

As with most independence movements until post-colonial era, its rhetoric was nothing to do with abstract economics and everything to do with religion, language, and ethnicity. Even the ownership of land had been substantially reformed in the 1870s and 1880s, neutering the one economic issue that normally boosted independence movements.

And as for the economics, Irish economic policies produced European-standard growth outcomes on average until the late 1940s. They produced terrible outcomes for four decades between the post-war devaluation of sterling and the 1987 reforms. This does not speak to the idea of a subsidy from the UK to Ireland, which makes no sense from a historical perspective of colonialism anyway, but rather that good policies adopted by post-war European societies were not adopted by most of the European countries that did not fight in the world wars.

That's an awfully longwinded way to suggest that you were going to refute what I said and then fail to do so.

"This does not speak to the idea of a subsidy from the UK to Ireland" - which really was true - no wonder you've failed to refute it.
"which makes no sense from a historical perspective of colonialism anyway": oh dear, what has colonialism got to do with it? For more than a century before independence, Ireland was part of the UK. Indeed, because it was part of a unitary state, who subsidised whom was unclear enough for the nationalist politicians to get off with - even conceivably believe - their stuff about subsidy.

"abstract economics" is a very droll description of a politician's promise of wealth: thank you for raising a grin.

It is hard to refute a statement when the exact claim is frustratingly vague. That is to say, you have provided no evidence for your claim that the lesser partner in the Union was subsidised by the mission civilisatrice of the benevolent Blimps.

Of course Ireland wasn't a colony, it was part of the UK. Just as Algeria was part of the Fourth French Republic - also not a colony, I presume.

? Ireland achieved independence in *1921*.

Algeria achieved independence in ?1961?

I don't see how the cases are parallel?

Was Algeria fully represented (indeed overrepresented) in the French parliament on a nonracial/nonreligious franchise? Are you a bloody fool or just dishonest?

"Was Algeria fully represented (indeed overrepresented) in the French parliament on a nonracial/nonreligious franchise?"

Your narrative of Ireland pre- and post-independence is hilariously askew.

Ireland's war of independence effectively started in 1916. At the time the "nationalist" politicians, elected on an exclusive franchise of the richest 25% of the people, criticised the uprising as foolish and destructive. Independence was won with blood and fire, not with an argument about economics. They only became politicians after the bloodshed, and enormous electoral reform.

"After independence the population learned, alas, that the subsidy had been flowing the other way."
This is breathtakingly naive of the politics of the time. Just before the Great War, government expenditure was only about 15% of GDP. This was largely spent on education, policing and war. To the average Irishman of the time, the British military and police force was generally not exactly considered akin to a subsidy. There was no welfare state to speak of, and the less said about the British attitude to funding education in Ireland the better. The level of real economic subsidies were almost certainly negative, but could not in one's wildest dreams have exceeded +5% of GDP.

"So, after a couple of generations of being a backward, shabby little dump, by dint of EU subsidy, some well-chosen policies of their own, and the efforts of the population, they join the first world. Hurray!"
Telling that you place EU subsidies (which accounted for, oh, about 2% of GDP) before Irish policies, favourable demographics of people well educated by the O'Malley reforms of the 60s, access to international markets, and Solow convergence.

"But then then their politicians persuaded them to give up part of their independence by joining the Euro, on the promise that it’d make them all even richer."
And again, nice of you to portray one of the most educated nations in the world, who read more newspapers than anyone in the world (well, at least they did before the internet changed all that) as underlings following the will of politicians.

Laugh if you wish, Ireland is still more than 10% PPP than the UK.


"There was no welfare state to speak of" says Enda H. Wrong - there was unemployment insurance and the old age pension.

Dearieme's "there was unemployment insurance and the old age pension."

Oh please. Life expectancy for those born in Ireland in 1926 was 57.4. The old age pension only began at age 70. Unemployment insurance did not apply to farmers (i.e. the most common occupation of the Irish population), and was limited to a maximum of 15 weeks per year.

I stand by my comment that there was no welfare state to speak of, and that the maximum reasonable subsidy rate was 2% or 3% of GDP. Probably negative in real terms, and positive 5% in one's wildest dreams.

It may be the case that a breakup of the Euro would hurt Germany more than it hurts most other Euro countries and that continuing the Euro is better for Germany than a breakup, but that saving the Euro would benefit others who are undeserving (whatever that may mean). Should Germany cut off its nose to spite its face?

The underlying assumption of the bolded sentence is that pain is required to solve Europe's problem and that those who have benefited more should endure more pain. There's no good reason to believe this is true.

Economics is not a morality play. The question is how to increase growth and employment in the Eurozone. The answer appears to be more spending, somewhat higher inflation and an ECB guarantee of sovereign debt. Even if you believe austerity is working, should you favor policies based on some notion of past unfairness or should you favor policies that are likely to work?

Even if you frame economics as a morality play, one usually punishes based on who caused a problem rather than who benefited.

Germany appears to have a large measure of control. If it caused a mess, it should pay to fix the mess, even if others might have seen more income growth during some recent period.

Don't we punish criminals even if their victims had larger income growth?

As far as I can tell, some people want to increase spending because they believe that will increase growth and jobs right now. Others want to reduce spending because they believe that will increase growth and jobs in x years time.

They might both be right.

Austrian data make me wonder whether there's some political upheaval there I don't know about. 20%-40% fall in income is the sort of thing that causes revolutions.

Don't know where UBS got the data from - but sth MUST be wrong. It's plainly impossible that Austrians have lost 30 pct of their disposable income from 2000 to 2010. There MUSTbe a bug in the Austrian data - so I prefer to believe in no of Donovan's data and conclusions.

Suspicious indeed and for other reasons too: There seems to be some technical hanky panky about the way they have adjusted for inflation (remember these are real incomes, not nominal) e.g.

"They sought to identify income-specific inflation rates because headline figures only offered average rates, reflecting average spending patterns. The team used data from Eurostat to re-weight the composition of headline CPI, to try to better reflect the spending patterns of the different income quintiles. "

I'm no economist but is this standard procedure, to adjust each income group by a different CPI? Are those micro-CPI's well established or just a handle to skew data to suit your priors?

A lot of the UBS figures are difficult to believe.
OECD figures on trends in income inequality can be found at http://stats.oecd.org/Index.aspx?DatasetCode=INEQUALITY

They show for example that between 2000 and 2008 the Gini coefficent for the Netherlands showed no real change (from 0.292 to 0.294), whereas the chart in the FT article suggests a massive increase in inequality in the Netherlands. The OECD also show a very large increase in inequality in Germant whereas the UBS figures suggest not much of a change.

The UBS figures also look inconsistent with Eurostat figures which go up to 2010. See http://epp.eurostat.ec.europa.eu/tgm/table.do?tab=table&init=1&language=en&pcode=tessi190&plugin=1

The inherent structural problems of the Euro -- no way to easily re-align wages and prices if they got out of line because of inadequate labor mobility – were recognized in advance. The way those wages and prices might get out of line was not. The restraints on government deficits, evaded at the margin by all (and fraudulently so by Greece), were meant to prevent wages and prices from ever getting out of line because through fiscal deficits. Except for Greece, they worked. The danger turned out to be elsewhere. Participants in capital markets mistook the disappearance of exchange rate risk for the disappearance of country risk. (Prudential regulators of banks went along with this confusion and allowed banks to treat all sovereign risk as equal.) Indeed it was worse; because of inability to easily re-align wages and prices if they got out of line, country risk (not sovereign risk) increased. When Greece happened, instead of treating it as a problem for bondholders, policy makers validated the market confusion of exchange rate with country risk, and so it became a problem for the Euro zone.

Perhaps there were Austrian economics type misallocation of investments arising from the market confusion – too many castles built in Spain – but these must pale in comparison to the losses arising from the attempts to re-align periphery wages and prices through fiscal austerity.

This seems right but I'm not sure I completely understand. What do you mean by exchange rate risk and country risk? How did the inability to easily realign wages and prices increase country risk?

It didn't. After the adoption of the Euro, credit spreads in the EZ basically converged. Greece, which had faced much higher borrowing rates, now found itself able to borrow at rates similar to Germany.

This was a mistake, a gross overestimate of the extent of "fiscal union" implied by the Euro project. It's as if Panama (which uses the US dollar as currency) could suddenly borrow at US rates.

In the last couple years, investors have had a change of heart about the extent to which Europe stands behind the debt of member countries, and spreads on (e.g.) Greek debt have moved back to pre-Euro levels.

As a fiscal conservative, I'm generally sympathetic to Germany in this mess, but I'm starting to feel like a kind of old fashioned mercantilism drove German money into poorer EU countries to stoke demand to make way for German exports, and those who lent to Greece at ridiculous rates should take their share of lumps here.

It's a good thing there have been no confounding developments - increasing income inequality across the Western world, for instance - that might make this evidence hard to interpret.

For instance, if there were a great concern with recent increases in inequality in the United States, that might suggest a broader secular trend that isn't related to monetary economics. Good thing nobody has raised concerns about the 1%.

Let's talk inequality in terms of global income distribution. What's with the insular preoccupation with assessing this at a nation-state level?

Did they correct for any changes in the composition of households, measurement of inflation etc. for those figures? If the lower deciles grew poorer but those lower deciles include many more low-skill immigrants for example, some of these graphs are unsurprising and aren't an indictment of the Euro.

This seems like a really terrible and simplistic version of the cross country growth regressions that were themselves abandoned for their lack of empirical rigor and usefulness.

I would say the key point here -- which is backed up by other sources -- is that the average German has not made out like a bandit from the eurozone.

I think this is correct, but it probably has not got much to do with the Euro. The Hartz reforms have seen real cuts in social welfare benefits and also in wages for the lower paid in Germany. It is these structural reforms that have impacted on German income distribution and not transfers to Southern Europe, although such reforms are likely to have reduced the willingness of German workers to engage in future transfers.

No one is saying the average german has done well, from the perspective of the periphery its the German elite(bankers, politicians, big business etc) that we hate not the average German Factory worker etc. Everyone knows about the German policies of wage deflation.

This is the second, and more serious, part of the account of a visit to Greece I linked to in another thread:


The blogger argues that the Greeks did get a great deal from the Euro, a brand new subway network in Athens. It will be hard to repossess that. Otherwise the population of the country is low enough that they can go back to being a nation of peasant farmers and fishermen after they leave the Euro and default, but they will have a subway network on top of that. He seems to think that Greece will be fine.

Tyler: there you go again.

This is another misleading graph.

Basically the mechanism for obfuscating the truth here is that smaller economies grow faster from a low base. And from that you get Greece, Portugal, Spain and Finland. And then cumulative gains keep all the gains from the low growth from a low base when then adding in the recession, so you don't see the effects of the recession. There is a second effect as well -- the graph doesn't show 2011 and 2012 adding into the cumulative amount. You don't see that Greece and Spain have actually given up all their gains!

Look at the graph. Germany looks like a nightmare! Income decline in all deciles!!? Ah, but it has experienced slow stead growth in cumulative real disposable income and then hit a major recession which wiped out the steady gains of a large economy. Much like the US, we are getting back where we were in 2008 only now in income. (This graph for the US looks like Germany.)

Look at the graph. Greece looks like a paradise! People in all deciles have been gaining more than 20% in real disposable! Ah, but actually that includes all the growth from a low base from 2000 -- so you don't see any effect of the recession wiping out all the gains ... at least by 2010! By 2012 ALL the gains are gone -- they haven't returned to their peak. (The graph for Estonia would look like the graph for Greece.)

Seems like the Euro tagged along for the ride with countries that would have grown a lot from a low base anyway (well, we can't tell from this graph!!) and now that the recession has hit, they have to pay a price. Seems like a net negative -- but we can't tell from this graph!!

Is the major skill of economics creating graphs that obfuscate information while looking like they are showing what looks like information? It seems like it.


Jason, I never blindly trust a graph...even the ones I make myself. I see MR as a place for things to think about (as you clearly did with this one graph) and not definitive answers (which are pretty scarce in any discipline). So in principle I agree with your warning, but I think it should be a bit more general.

It is sad day if we allow a world where there is so much manipulation of data that no one can trust a graph. Data is hard to get (although the FRED database makes this easier). Producing results takes time and requires software. Few forums (I actually can't think of any) allow for commenters to post a graph of their own.

All of these facts allow for a mode of misrepresentation that is more insidious, harder to detect and even harder to counter with the truth. Besides, this graph does not actually support what Tyler is saying. It is not giving you something to think about. It distracts your eye while he goes for your wallet.

-- If you want to look at reasons why the Eurozone periphery should "endure more pain", why break it out by income deciles?

-- If you want to look at who should "endure more pain" today, why stop the cumulative summation in 2010? It is 2012.

--If you want to loot at who should "endure more pain" why look at rates? If I had a Euro and made one more because of joining your zone, that's a 100% increase. If you had a thousand Euros and made 100 more after I joined your zone, that's a 10% increase. But if it goes bad, should you take a Euro from me or a Euro from you? This means you should look at real *levels* if you're going to talk about the morality of the situation.

Of course, if you step away from moralizing (talking about "pain") the obvious choice is monetary policy and inflation. It is the optimal policy solution that we have available today. Fiscal retrenchment is generally destructive to countries. No need for anyone to take "pain". Money illusion is the opiate of the masses.

In any case, this graph is not an innocent "something to think about". And the data in it did not make me think about the situation. Tyler has placed several graphs here in the past couple of months that have been misleading:

(This one is just laughable *mathematically* incorrect. You can select a normalization year that makes that country come out on top for each country. This is not true if you normalize to the trend or to the peak -- neither of which allow you to fudge with the normalization year.)

(This makes the same mathematical error as the previous on on Iceland.)

(This is basically the same point Tyler makes in this post ... not enough pain. But again, the graph misleads.)

It is a general trend.

Jason, I realize it's a common rhetorical device on blogs (posts and comments) to accuse people of data manipulation and drawing willfully false inferences from empirical work, but it seems to miss a fundamental point. Our economic reality is complicated (and often poorly measured). Graphs, regressions, and other summary statistics are just an attempt to distill that complexity. There are lots of choices to be made and you won't agree with all of them...and even if you like the graph you might draw a different conclusion than the author. My point about thinking for yourself was not an innocent one...it was realistic. But I did check and my wallet's still in my purse.

this is an inaccurate assessment. places like greece got richer for a time being by over borrowing and dodging taxes. the whole euro crisis is primarily because of this. their disposable income was high because it was all borrowed money. and who's subsidizing that? countries like germany. it's clear to see this from the chart. even despite the euro agreement not allowing for bailouts -- greece got one. for a time being people in greece lived better than most germans they bought their 70K dollar cars from on middle class wages. I'm talking household electrician pay grade. I saw one electrician in greece who had about 5 cars, 1 for each of his family.....all of them he was selling off, each costing about 30K a piece at the very least. in fact, the car he bought to replace the 70K main car he was selling, cost around 30K dollars. so in total, an electrician bought over $250K in cars in just a few years....all on credit...then unsurprisingly couldn't pay for them all.

even today in greece, you'll see their people walking around in $100's of designer clothes wondering why they're poor, going to free clinics begging for help to get medical attention for their children. I'm sorry, but when you waste you money on $800 leather jackets and $100 on just a t-shirt, you don't have a right to complain when you become poor.

and now places like greece expect to be supported in the form of welfare by other countries like germany. that's what the riots in greece were all about -- they were mad that their welfare was getting cut back.

what greece seems to think is that by being bad with money, and losing all of their money and credit, they should just be given money. that's no different than bailing out banks for using bad practices. you don't reward someone who wastes their money, with more free money. just like you don't give a gambler his money back after he loses all of his money.

places like greece did nothing good with their borrowed money. they didn't use it to create infrastructure that would bring in wealth, they used it entirely on personal luxuries. the only reason the 'rich' got richer, was because the richer countries weren't stupid with their money. they didn't borrow more than they can afford to pay.



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