Proof that the euro crisis has not gone away
If you’ve been following the euro crisis over the past few years, you’ll doubtless recognise the chart above. It depicts unit labour costs – a measure of how much it costs to produce a given unit of economic output – in other words, it’s a yardstick of efficiency. The lower you are on the chart above, the more economic output you create for each pound/euro/dollar.
Why is this significant? Because if you’re sharing a currency and interest rates (as the members of the euro are), then you’d expect that over time the efficiency of your economies would converge. Otherwise you wouldn’t be getting the same bang from your buck in one part of the currency zone as you do in another. And, if you’re going to allow these disparities to endure, sure as night is day you will have to permit permanent transfers of cash from one part of the currency area (the efficient part) to another.
The euro crisis was a direct consequence of the enormous gap in efficiency between northern economies (well, mainly Germany) and the Mediterranean economies. You can see it in the chart above. The enormous deficits and debts which Greece, Spain, Portugal et al have suffered are a consequence of their wildly divergent capacity for generating economic output (for more on this see this previous post).
All of which is why the direction of travel on this chart (updated today by the OECD) is worrying. We are now more than three years on from the first Greek bail-out and although some countries (Ireland, Spain) have converged – their inefficiency has fallen and the gap between themselves and Germany has narrowed – others have not. In fact, Italy and France seem to be about as far from Germany in terms of economic efficiency as they have been since the start of the euro crisis.
There are, moreover, good reasons to suspect that the falls in unit labour costs of the most troubled, struggling eurozone nations (Greece, Ireland, Portugal and Spain) are overstated, partly since they reflect falls in employment rather than actual profound increases in their capacity to produce goods and services.
The simple lesson of the euro crisis remains the same as it was even before the worst of it began: either Germany will have to increase its costs through inflation, pushing up the dotted line at the bottom of the chart. Or the rest of Europe will have to reduce its costs, pushing down the rest of the lines. Or else Europe will have to work out a permanent means of transferring wealth from Germany to everywhere else. Or the euro will have to break up.
Simple as that.