The end of the long lunch
Ralitsa Kovacheva, January 5, 2011
I do not know whether it is fashion or an atavistic reflex, but more and more frequently I stumble upon comments devoted to the European Union, strongly criticising the despotic Brussels and blame Germany for being thirsty for power, and on top of that these comments suggest a sympathetic attitude toward the victims of the debt crisis in the euro area. Poor Greeks, Irish, and perhaps soon the Portuguese, which, you see, carried on their backs the German boom after the introduction of the euro, and now they are on their knees because of the Eurocrats. And they were humiliated by selfish Germany, who did not want to pay for their salvation or it did but not with displeasure. In this respect, the Greeks and Spaniards have perhaps the strongest voices.
Dr Vasilis Margaras, a Visiting Research Fellow at the Centre for European Policy Studies (CEPS) in Brussels also joined this choir. In his article "The political bankruptcy of Europe", published in his blog in the EUobserver, Vasilis Margaras extensively criticised Brussels and Germany: “Merkel behaves more like a small Town Mayor whose narrow-mindedness cannot escape the borders of her little constituency rather than a leader of a united Europe.“
Obviously, the author has conveniently forgotten the small fact that Germany is the largest donor in euro area's rescue fund, established because of Greece and is also the biggest contributor to EU's budget, from which Greece has been generously receiving euro funds for years. On top of that, according to Mr Margaras, “rather than explaining the real issues to their publics, politicians tend to demonise certain countries (the so-called PIIGs) in order to justify errors and cover-ups of the past.”
So be it
Let’s have a look at the past and search for the mistakes and the lessons. I have to say in the beginning that the problems of those countries are far from being the same, but some generalisation is needed for the purposes of the analysis.
So let’s start with the euro. All wails of the countries which claim to be victims of the euro, invariably reach the question why have they adopted the single currency in the first place? Maybe they haven’t even realised how it would affect them? Hardly. In her book “The Downing Street Years”, Margaret Thatcher wrote: “The countries with less developed economies would be devastated by a single currency, but they hoped to get enough subsidies so that their consent would be justified. The case of Greece was a classic one”*. Moreover, this statement was made in mid-80's and Greece adopted the euro in 2001.
According to Margaret Thatcher, “the deal” for the creation of the Economic and Monetary Union included “Germany and France ... to pay all the regional subsidies” because otherwise “the poorer nations will not agree.” Commenting on her inability to win the Spanish support for the British position against the common currency, Thatcher wrote: “Spain was extracting such benefits from the Community that I couldn't make a Spanish Prime Minister from the Socialist Party to question the arrangements, so profitable to his country.”
But undoubtedly the most interesting is the behavior of Greece, in the face of its Prime Minister Andreas Papandreou (father of the current Prime Minister Georgios Papandreou). According to Thatcher, “Mr Papandreou had always managed with a remarkable success to gain subsidies for Greece from the Community”. In her memoirs, Margaret Thatcher described very colourfully the discussion on the accession of Spain and Portugal to the EU at the European Council in Dublin in 1985:
"Negotiations were heading towards a favourable for all solution. And suddenly, Mr Papandreou, the Greek Prime Minister from the left, played a classic Greek play. Otherwise, he was a charming and easy-going person, but his entire being was changing when it came to get more money for Greece. He intervened and imposed his veto on the enlargement of the Community, while an agreement was achieved granting a large amount of funds for Greece during the next six years. ... We all were furious, not only for being kept as hostages by Greece, not only because of the tactics applied, but for the fact that a country, admitted into the Community in order to further strengthen its fragile democracy, now prevented the Community from accepting in its ranks the former dictatorial countries Spain and Portugal.”
I do not want to think what would have happened to Greece in May last year, if Ms Thatcher was still a British Prime Minister, although David Cameron is successfully following her political line.
On the other side of the medal
is the past of the other major "culprit", besides Brussels - Germany. In an extensive analysis of the crisis in the eurozone Carnegie Endowment dedicates an entire chapter on Germany, exploring the reasons for the German stability against the background of the overall crisis. But before analysing the effects of the euro, the authors return back to Germany's unification in 1990. Then the Western half had to make significant investments in the East in order to modernise the economy and to help equalize the standards of living.
“Unit labour costs (ULC), which measure increases in wages relative to productivity, rose significantly.” Wages in the East began rapidly catching up those in the West, in spite of the much lower productivity. As a result, ULC increased by 17.6% in five years (1990-1995), compared with 11.5 % in the countries of the future euro area. As a consequence, Germany's competitiveness decreased significantly, and unemployment doubled - from 4.2% in 1991 to 8.2 % in 1994.
“Germany responded to these challenges with structural reforms, including
wage moderation and industry restructuring. Government spending on employee
compensation fell by 1 percent of GDP from 1993 to 2000 and the private sector
soon followed the public sector’s lead”. Rising unemployment and the possibility for companies to seek cheaper labour in other countries, forced local workforce to stop blackmailing employers through trade unions and collective bargaining. (You may still remember Thatcher, right?) As a result, between 1995 and 2000 ULC in industry fell by 3.4% and remained almost unchanged in the services sector.
Following these changes, exports began rising as from 1993 to 2000 exports' share in GDP increased by over 10 percentage points - from 22 to 33%. Although losing 3.5% of its world share, Germany was ahead of other advanced economies, whose share fell by 6.3 percent. This trend was further stimulated by the introduction of the euro. And while the countries of the GIIPS Group (Greece, Ireland, Italy, Portugal and Spain, which analysts mercifully do not call with the popular abbreviation PIIGS) “became more inward-focused and driven by domestic activities, Germany became the world’s largest exporter”.
Despite the obvious economic boom, wage growth in Germany remained moderate and ULC - highly competitive compared to the rest of Europe. “From 2000 to 2009, unit labour costs rose 7 percent in Germany, compared to an average increase of 31 percent in the GIIPS over the same period.” In words - thirty-one percent! At the same time, the average annual GDP growth of Germany was 1.4%, and that of the GIIPS Group - an average of 3%.
These data clearly show the difference between Germany and the GIIPS Group in their understanding how the economy should develop and how the profits should be used. Obviously in the former case profits were invested and in the latter – just eaten. Moreover, garnished with plenty of EU funds to enable these countries to "catch up" with the old Member States. Instead of catching up through reforming and economic developing, they preferred to catch up (even outrun them) only in terms of income without thinking who would pay for this social generosity. This is the reason for the “PIIGS”' problems (and obviously – for their nickname) rather than market economy (which I haven't heard Germany to have given up) nor the financial crisis itself.
What is happening in Greece and is about to happen elsewhere, is the end of a long, seemingly free lunch. The bill will be paid now by the taxpayers, not because Brussels says so or because Germany wants so, but because their own politicians had raised their ratings with other people's money. And voters kept their eyes closed because they had a good life. This should be a good lesson for everyone who expects Bulgarian authorities to generously give everything to anyone while disguising it as social justice and solidarity. It is high time for us to learn from good examples, not just from the dodgers. It's simple – those who don’t work, don’t eat.
*All quotations in the text are translated from the Bulgarian edition of Margaret Thatcher's book The Downing Street Years