How much does a pint of beer cost? The answer, of course, depends on where you’re buying it.
I can tell you that if you’re in a tavern in Athens, the answer is: a surprising amount. If you’re drinking in Berlin, on the other hand, it’s surprisingly cheap. In fact, a pub crawl across the continent can tell you more about the single currency’s crisis than any economic textbook. Honestly.
That pint of lager in Athens goes for about £4.24, according to the website pintprice.com (h/t Simon Derrick of BoNY Mellon for introducing me to it). Meanwhile in Berlin, you can pick up a pint for a mere £2.45. In fact, a pint of beer costs less in Germany than in most of the Mediterranean countries (Madrid: £3.15; Rome: £3.93, though Portuguese lager is a snip at £1.69 in Lisbon – though beware, I cannot vouch for the reliability of these figures).
So what? Well, this underlines the central problem with the euro. Greece is a fundamentally less productive economy than Germany: in other words one unit of economic output (eg activity, profits etc) costs comparatively more to generate in Athens than it does in Germany. This isn’t the only reason beer is comparatively more expensive in Athens (alcohol tax, differences in supply and demand and licensing restrictions also play a part), but it is one of them.
As a tourist or a business, it costs more in Athens (or for that matter Lisbon or Rome) to get the same product or service you can expect in Berlin.
There’s nothing inherently wrong with this. Such disparities are rife throughout the economic world – even within countries.
The Italian economic powerhouse region of Lombardia, home to Milan, is 4.8% more efficient than the Italian national average, as measured by unit labour costs – the price you have to pay to elicit a particular economic outcome. In the far more impoverished Campania region, on the other hand, unit labour costs are 7.9% above the national average.
You can see the same disparity in Spain, where rural Galicia is 16% less efficient than Madrid (all these figures are from a 2001 EC study – the most up-to-date data I’ve found on this). In Britain, Wales, Northern Ireland and the North East all appear to be significantly less efficient than London, based on some back-of-an-envelope sums by Simon Kirby of NIESR (the ONS helpfully doesn’t produce unit labour costs for UK regions).
Why do such disparities matter? Because in order to keep a country’s books in order and economy functioning, they need to be balanced out: those less efficient regions must be subsidised by the richer ones.
That’s why London pays far more in taxes than it receives in benefits – to the tune of 10.3% of local gross domestic product, according to the CEBR. That cash is, in turn, distributed to those least efficient areas: Northern Ireland receives a net subsidy of 29.4% of GDP, Wales 26% and the North East 22.2%. A similar pattern is at play in Italy, between Milan and Campania and in Spain between Madrid and Galicia. That is how countries – fiscal unions – work: the surplus generated by more efficient areas is distributed to less efficient parts.
The euro area is much like Britain in this regard: like the North East, Greece is far less competitive than its richer neighbours; like the North East, it does not have its own currency it could devalue to make its products (beer, tourism etc) cheaper; like the North East it can try to cut costs and become more efficient, but it won’t happen overnight. The North East, after all, is unlikely to catch up economically with London any time soon.
The big difference is that there is no established fiscal union to channel money from the rich areas to the poor ones to compensate for this gulf in economic capabilities. If the euro is to function, such transfers will simply have to happen for decades – fiscally or through monetary means, eg euro-wide inflation (which, given the German mindset, is the only thing less likely than giving money away to Greece).
No-one should be surprised by this – especially the Germans. After all, it’s precisely what happens in their country every year, between the wealthy West and old Soviet East. It is what happens in Italy, much to the chagrin of the Northern League, who would like to secede and keep their cash rather than giving it to Naples or Sicily. It is the way economies work.
Now, consider the following chart.
It’s a measure of how efficient various euro economies are. The higher the country on the chart, the less efficient it is (the more it costs to get the same economic product).
The gulf between the member states has widened, not narrowed, since the currency was established. Even more damning, it is Germany which is the biggest outlier.
It is iron-cast economic logic that the countries at the bottom (of this graph) will have in some way to support the ones at the top. Or else the euro cannot survive.
The real problem with the euro is not Greece. It is not even Germany (though it is more of an outlier than Greece). It is that none of the countries seems to be aware of what they have already signed up for.