The eurozone is too big… (24)
Autors: Mortens Hansens
Publicēts: 2010. gada 26. februāris 01:19
Atslēgvārdi: , , .
x

Nosūti raksta adresi draugam.

I have used the graph below in another context but I thought some might find it interesting and at least it made me think. A first guess is that I will use it for a Latvia-bashing purpose but that is not the idea (although it would work…).

The graph should be read as a measure of development of competitiveness. For those not so familiar with the notation, REER is the Real Effective Exchange Rate. Unit labour costs are labour costs per unit of production – if wages increase 15% but production only 5% unit labour costs are up by 10%. The development of unit labour costs are then adjusted for the development in nominal exchange rates in trading partner countries and weighted by the share of such countries in one country’s overall foreign trade.

A few examples: The UK has seen a decline in REER over the period in question, reflecting the app. 20% depreciation of the British pound against the euro and British competitiveness has thus increased. Denmark has lost competitiveness, partly because wages have risen faster than productivity but mainly because of depreciating currencies in two large trading partner countries, namely Sweden and the UK. Latvia, well… – a massive real appreciation almost exclusively due to the wage explosion of the ‘fat years’ where wage increases outpaced productivity by a long way.

Cumulative change in REER Unit Labour Cost Index 2004Q1- 2009Q2

MH_9

Source: Eurostat

But what I am mainly interested in here is the development in Germany. It is the only euro country to have managed a real depreciation i.e. having managed slower labour cost development than productivity increases and the interesting part is that this is nothing new – it is eerily reminiscent of the pre-euro days where various currencies were regularly devalued against the Deutschmark for exactly the same reason, namely that Germany managed cost control better than anyone else and thus kept gaining competitiveness.

Nothing much has changed – German economic policy is still dominated by tough inflation hawks such as Jürgen Stark* or Otmar Issing, current and former members of the ECB Executive Board to name just two.

The rest of us just cannot match the inflation discipline of the Germans but in a eurozone with irrevocably fixed exchange rates we can no longer devalue to regain competitiveness, thus the superior German export engine just keeps humming.

There is a lot of talk these days about whether Greece might leave the eurozone (they won’t, of course) – but should the eurozone be broken up, a better split would actually be between Germany and the rest. Only Germany really fits into the labour cost obsessed and inflation obsessed eurozone but what is a monetary union with just one country?

Just a couple of lines regarding the lesson for Latvia. To join the eurozone and benefit from membership Latvia has to demonstrate inflation discipline and fiscal discipline of hitherto unseen proportions. The country is currently involved in that via the ‘internal devaluation’ where wages and thus unit labour costs are being depressed. To me, the jury is still out there on whether this will succeed – then again, I give it a much better chance than in Greece. But why not be on the safe side and offer a Latvian passport to Jürgen Stark?

* I have once met him – ‘inflation hawk’ are somehow not strong enough words to characterize him.

And just to pre-empt a couple of comments:

1) The loss in competitiveness for Latvia looks enormous – does all of that have to be rolled back? No – most likely the lat was undervalued back in 2004 but how much down unit labour costs have to go is much debated i.e. at which level is the lat neither undervalued nor overvalued?

2) True, Germany may have been undercompetitive (having had an overvalued euro) in 2004 as a result of reunification and thus needing to regain cost competitiveness but they are still the only ones who can really master it. Witness Italy, Portugal, Spain – and Greece, of course.

x

Nosūti raksta adresi draugam.

(13 balsotāji )
Komentāri

njaaa,vaacu muizjkungs mums nodereetu…:)

No one had noticed that, also here… While the rest of the world was having fun trading with real estate, Germans had actually been implementing impressive labor market reforms, all the years after the unification, and as a result, became very competitive. The newspapers over there were full with articles on this subject… But here (and actually in the rest of Europe) no one cared, because who cares about Germans?! They don’t make movies and all shows are about the US…. I have never been quite sure about this new fashion of anglo-saxonism… About this idea that the first foreign language should be English. Actually, if Latvians want to compete and be better off some day, they should start learning German. That is our ‘hub’, that is our learning-by-doing source,… have always been and will always be, irrespective of what happens…

Ja, da kann man doch auf etwas stolz sein, na? Da sind wir wieder – am Elba/Donau/Neris Ufer. Also, ich sage nur eins, da sieht man doch Martin Luter durch, oder?

Yes, nobody speaks any longer of catching up the Europeans in 15 or 20 years in terms of salaries and prosperity. Nobody. And it seems to me that Latvia would newer succeed in that. We will always be lagging behind such countries as mentioned Germany, or the Netherlands and Denmark. The most we can hope of is to catch up such counties as Greece or Portugal. But never the Nordics.

Ko var te ņemties ap euro. Pavisam nesen uz bankrota robežas bija Kalifornija, kas ir mazliet lielākā ekonomiku par Grieķiju. Vai toreiz kāds sāka runāt par USD zonas izjukšanu?
Tad jau drīzāk Kosova izstāsies no euro zonas.

“…if wages increase 15% but production only 5% unit labour costs are up by 10%…”
Correct would be 9,5%. (1,15/1,05 = 1,095)

Tur ir tā problēma, ka eirozonā, atšķirībā no ASV, nav vienas centrālās finansu ministrijas un vienas treasury, ir tikai centrālā banka.

Piekrītu Bo. Eirozonā ir vienota teikšana par monetāro politiku, bet ne par fiskālo politiku. Kā parāda šī krīze, dažām valstīm trūkst fiskālā disciplīna, kā rezultātā tiek apdraudēta vienotā monetārā politika. Tāpēc tagad arī ir pacēlies jautājums par to, kā Eirozonai būtu jāvirzās tālāk – proti, jāpanāk liekāka centralizēta vara arī fiskālās politikas noteikšanā.

1)tas tikai pierāda latvijas ēnu ekonomikas lielumu, noņemot to mēs esam vismaz vienā līmenī ar igauniju
2)lielās algas saņem : rīgas siltums, satiksme , fktk utml nevis ražosānā iesaistītie.. 40% saņem 200 ls (kas atkal ir apšaubāmi) algas pret IKp noteikti nav latvijas konkurentspējas rādītājs
3)inflācija dzinulis ir tautas partija uc mafiozās struktūras, ja tās neievēlēs, mūs inflācija neapdraudēs
4)jau kuro reizi pierādās dāņa un vispār dažādu ekonimistu nejēzīgā ekonomikas izpratne, lasīt viņu rakstus nozīmē meklēt garudus sēnalās:P

I have also met J.Stark on an occasion about 11 months ago. He is a very fascinating speaker and economist. However, when talking about his role at the ECB we must recognize that the ECB as a structure is dominated by germans and mostly bankers from the Bundesbank (German Central Bank). As such, the ECB was set up with the German inheritance of fear from inflation (see Weimar Republic hyperinflation). The agenda sees a priority of inflation just as much as the US Fed sees stock market as priority (see Black friday and thereof following Big Depression).

But J.Stark’s days at the bank are nearing its end. Germany has manouvered the Italian proposed new president of the ECB out of the race and have opened the doors for Bundesbank current head Weber to become the President of the ECB. Taking in account that each Euro nation is allowed to have only one Member of the Board this would also mean that J.Stark has to leave ECB, either retiring early or taking Weber’s place at Bundesbank.

Unfortunately, Weber,who I have met more than once, is no better than Stark. If anything, he is even more intimidating (in terms of intellectual capacity and experience).

As with regards to the article – it has been said for months now that Latvia experienced too much nominal wage growth vs productivity growth. But it was also noted that competitiveness loss occured somehwere around 2007/2008. Taking 2004 as a base year is fair only in terms of development. It doesn’t show anything about actual levels of nominal labor unit production cost, which is what should be looked at.

Prof.Morten, I do see it hinted at, but I think it is brisked over too shortly to actually imply the importance of this in terms of real life application.

As a point of study (educational purposes) the example is great for use in the classroom, but with little applicability in the real world if nominal values are ignored.

11.

Tur jau ir tas āķis, pašreizējie satricinājumi tiks izmantoti lielākai centralizācijai. Ar Euro nekas nenotiks, tikai pamatojoties uz šo satiricājumiem, tiks uzkurināta jezga, kuras iznākums būs tāds, ka ES centram tiks nodotas lielākas finanšu lemšanas sviras.
Nesaku, ka tas ir slikti un ka Grieķijas krīze tikusi speciāli tam radīta.
Tas ir jautājums par virzienu, kurā lēnām iet ES pārvalde. Nupat jau radīts it kā formāli prezidenta un ārlieta ministra posteņi, tagad notiks reformas finanšu politikā. Skat, mūsu Riektstiņš arī runā, ka diplomātijā var ekonomēt apvienojot Baltijas valstu vēstniecības.

Latest article from The Economist, last paragraph..
Even so, Latvia looks good when compared with Greece. It did not lie about its public finances or use accounting tricks. Strikes have been scanty. Protests are fought in the courts, not the streets. Both Greece and Latvia have had hard knocks, but Greeks became used to a good life that they are loth to give up. Latvians remain glad just to be on the map.

Interesting ending..

This no go ekonomist for Latvija. OK? Dr Hansens say bad about my country so it no go? I say right? I show that zvirbulēns have the good English speaking, yes?

MB >> Get your facts right – the Californian economy is far bigger that Greece’s – it is comparable to the UK and France.

Ignorance is bliss, eh, MB?

I really do hope that the reasons that we are not rioting do not include any of the following:
- culture of being quite and submissive
- belief that we cannot change anything anyway
- happy just to be alive or on the map :)

I do hope that they are:
- understanding of the economic situation and basic rules
- understanding of the role of government and principles of state budget
- trust in better future under improved market economy and increased experience
- acceptance of responsibility over the shit already done by our own employees (meaning – politicians)

However, I understand that this might be considered wishful thinking. :)

What surprises me is that such level of irresponsibility and total failure to understand what the word “country” means is exhibited by the country where European democracy was born already few thousand years ago. :) Of course, the news might show things with bias, but also my current impression is that greeks want to defend their rights to live beyond their means ((c) some international journalist) even if that is equal to protesting against oneself or protesting against cloudy weather.

Pierādīju, ka varu arī sakarīgi argumentēt svešvalodā, manas dāmas, mani kungi! Un viss!

>>Zvirbulens

Ju say bed about Mr.Hansen.
Bat ju are just god in konversasion with everybady in Englis.
OK? Jes?
Greit!

Velns parāvis. Hansens taču labi saprot Latviski. Protams viņš var rakstīt angliski, tomēr mēs, latvieši varam arī mierīgi šeit diskutēt latviski.

Laikam mums tajos gados iedzīts, ja kompānijā viens sāk runāt ar akcentu, tad visi metās vai nu krieviski vai angliski.

Protams arī zvirbulēns demonstrē valodas pilotāžu. Kur tad draugs kurmēns?

Latvijai lai iestātos eirozonā pirmkārt jātiek vaļā no korupcijas.
Šobrīd diemžēl korupcijas sērga jau ir ieēdusies pat daudzos privātajos uzņēmumos.

Šādā situācijā, jebkurš valsts amatpersonu lēmums ir apšaubāms. Kā var kontrolēt inflāciju, ja sabiedrībai nav pamata ticēt nevienam valsts pārstāvju lēmumam?

>>kolja

Nu, nu – nebija tik traki!

>>janka

“Latvijai lai iestātos eirozonā pirmkārt jātiek vaļā no korupcijas.”

Itālija…? janka & MB = nezinīši.

>>Janka

Iestāties eirozonā var dažādi. Var arī tā kā PIGS (Protugāle, Itālija, Grieķija, Spānija).

Es šajā gadījumā domāju par iestāšanās gatavību no valsts nevis eirozonas puses.

horoš pizģegeķ inostraņec, bļa ( vārdu spēle svešvalodā)

janis wrote:

”The agenda sees a priority of inflation just as much as the US Fed sees stock market as priority (see Black friday and thereof following Big Depression).”

since when does the Fed have a priority of holding up the stock market? the Fed’s targets inflation and employment, so its different from the ECB, but not as you describe it. next time you meet Stark and Weber ask them to explain the difference to you.

janis also wrote:
‘Prof.Morten, I do see it hinted at, but I think it is brisked over too shortly to actually imply the importance of this in terms of real life application.’

i think all the information you’re looking for is actually in this post, if you’re hanging with Weber and Stark, are you actually talking economics or just serving them coffee? makes one wonder when you write a post like this.

jonas

Vēl šajā sadaļā
Viesi raksta » Mortens Hansens
Meanwhile, 26,1% later… (40)
Mortens Hansens

Since GDP reached its zenith here, in Q4 2007, the cumulative decline has been 26.1%. It is a huge decline by any standards. GDP is back [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Can’t pay? Can pay! (97)
Mortens Hansens

That is the beauty of Latvia. You think you’ve seen it all and, nevertheless, something crops up and surprises you. Thus Inguna Sudraba, Head of the [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Spending like the Nordics, taxing like Americans (68)
Mortens Hansens

I know I have used this sentence before but it is a good one. It was used in despair about the Latvian economy by a [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
What to look out for in 2010 (22)
Mortens Hansens

Even by the yardstick of recession-induced diminished expectations it may sound preposterous to suggest that 2009 was not such a bad year after all. It [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
What type of economic recovery? (21)
Mortens Hansens

For there will be a recovery; there always is but that may be the last positive item of this entry. The graph below tries to show [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Irish vs Latvian lessons (52)
Mortens Hansens

A small, relatively poor country on the periphery of the European Union. Unemployment close to 20%, soaring public deficits and debt. Main export article: People. Yep, [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
Convergence ® divergence (40)
Mortens Hansens

Prior to 2007 Latvia’s economy enjoyed several years of convergence i.e. catching up with the average income level per person of the European Union.  These [..]

Lasi visu »»
Viesi raksta » Mortens Hansens
The price of uncertainty (63)
Mortens Hansens

One of the main questions in the economic-political debate right now is how to jump start the economy. Unfortunately, it is a question with preciously [..]

Lasi visu »»

Mūsu draugi:

BNS LETA Lielie.lv Lursoft Robert's Books