Imbalances at the Heart of Greece's Crisis

In Greece and the End of the Euroland Fantasy, I suggested the trade imbalances at the heart of Greece’s debt crisis could only be resolved by Greece returning to its own national currency.

Correspondent Michael Gorback observed that there are other mechanisms for correcting imbalances in trade and productivity:

There is not one but 4 ways to address international productivity imbalances: currency revaluation, fiscal transfers, labor migration, and changes in local wages.

If you peg one of those the others must adjust. In the case of the Eurozone and Greece, the adjustment was largely through fiscal transfers with a bit of migration. Wages are not so much sticky as fossilized.

I submit that the reason the US does well under monetary union (ED NOTE: that is, all 50 states use the same currency, the U.S. dollar) is not so much its fiscal union as it is the strength of compensatory mechanisms that are far less developed in Europe.

American states and localities still engage in their own fiscal policies and productivity is by no means homogeneous.

The US enjoys excellent labor mobility – about 10x that of Europe.

It has seen numerous population shifts based on economics: the early western migration, the Gold Rush, migration of freed slaves to the north, Okies leaving the midwest during the Dust Bowl, the population shift from New England to the Sun Belt, and more recently the oil-boom-related migrations, to name a few.

Employers are also mobile. Furniture manufacturers moved from Western NY state to the South decades ago.

GE once had 14,000 employees in the town of Pittsfield, MA. Now it’s gone. Boeing is moving ops to SC. Beretta moved to TN. If the wages don’t adjust, the employers migrate to the lower wages.

The US, having a large and relatively less regulated private sector that’s also relatively unencumbered by unions, has greater wage flexibility than most developed countries.

I think these compensation mechanisms in mobility and wages work better for the US and that’s why the US handles monetary union better than the Eurozone.

The US still has to engage in interstate fiscal transfers but they’re mediated through the central government and few citizens give it a second thought.

Is the State of NY frothing over the fact that it gets back less federal dollars than it pays, and that the difference is going to Kentucky?

Why does Boeing open a plant in South Carolina and China open factories in Africa but BMW hasn’t opened a plant in Greece? If I were negotiating a bailout, those would be the reforms I’d demand – reforms that make business thrive.

Easing the process of labor migration within Europe was one goal of the Eurozone, and in terms of making it relatively easy for someone to take a job in another Eurozone member nation, it was a successful reform.

But this doesn’t really address imbalances in productivity due to differences in skills, education, cultural values and corruption.

Low-skill labor is more easily recruited than high-skill labor, and in a global economy, the choice of where to site a new plant or call center depends on many factors, not just wage arbitrage, i.e. going to where the labor is currently cheaper.

Many assume corporations have shifted production to China to take advantage of lower wages. But as wages rise in China, this is not necessarily the deciding factor: proximity to China’s growing market is often the over-riding factor.

A new book, Thieves of State: Why Corruption Threatens Global Security, highlights the many systemic costs of corruption.

The corruption that is endemic to Greece and China (among many others) imposes profound systemic costs on those economies, costs that may well loom much larger in the next global downturn than they did in the last Global Financial Meltdown.

I think it is safe to say that piling on more debt is the worst possible way to correct structural trade and productivity imbalances, yet that is the Eurozone’s “solution” to Greece’s debt/ trade/ productivity/ corruption crisis.

The discussion should be (as Michael pointed out) about creating conditions for business and real wealth creation to thrive, not jamming more debt down the throats of everyone on either side of the structural imbalances.


Charles Hugh Smith
for The Daily Reckoning

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