More on Core and Periphery

Maps like this make visualizing the core-periphery problems in the eurozone pretty fun.

Eurozone Debt : GDP - From the New America Foundation

The problem is, while this map (accessible here) is sweet for understanding certain regional trends, it’s counter-productive in many other ways – it leads you to see a certain symmetry that doesn’t necessarily exist.* Important differences persist among the periphery countries regarding budgets, productive factors and other structural issues. And these differences mean that the policies these countries can and should implement to address their debt issues are not the same. Although they’re all converging into poverty, the reasons they got there and the ways they can get out remain very different.

Take the example of primary surplus, which is a country’s revenues minus expenses, not taking into account interest owed on debt. As it currently stands, Italy has a primary surplus but Greece does not. But they both have overall deficits, largely due to high borrowing costs. Now there are two ways to address this problem: (1) cut expenses (austerity) or (2) restructure the debt (bailout). It can be argued then that while Greece should, sadly, push through austerity in that its spending patterns are unsustainable, Italy only needs to restructure some of its debt because its more basic budgetary ratios are in order. And though this would piss off investors who would take loses on debt holdings, it wouldn’t necessarily force the entire economy into a prolonged recession. Of course there are other repercussions of debt restructuring, like dis-incentivizing foreign investment, but that’s another story.

Other asymmetric indicators in peripheral countries include inflation rates and worker productivity. According to the CIA World Factbook, in 2010 Ireland’s rate of inflation was -0.9, Italy’s was 1.6, Spain’s was 2.0 and Greece’s was 4.7. In the same year, Germany’s rate was 1.1 and the US’s was 1.6. Most central banks aim for 2% inflation. Price levels in the EU are not converging right now and it’s not easy to see how the ECB could target healthier inflation rates in one region without negatively affecting other regions.

As for worker productivity, the OECD has this indicator: they take GDP per hour worked in the US, set that at 100 and measure the productivity of other counties as a percentage of worker productivity in the US. Greece comes out at 54.5, Italy at 73.2, Spain at 79.7 and Ireland at 97.3. There are many factors that go into worker productivity – e.g., it’s generally fairly low in central and eastern European countries perhaps due to their infrastructural backwardness – but it certainly seems that while increasing productivity levels in Greece, Italy and Spain could help, in Ireland it’s not really an issue.

Then there’s the example of an indicator whose significance is tricky to understand – current-account balance. I’m not sure if it means anything, but I did some calculations of the numbers from The World Factbook and came up with current account (CA) as a percentage of GDP. For what it’s worth, in 2010 Greece’s CA deficit was roughly 6% of its GDP; Spain’s was 4.6%; Italy’s was 3.8%; and Ireland’s was 0.9%. To get some perspective, the US’s was 3.2%. Meanwhile, the big surplus countries, China and Germany, had CA surpluses of 3% and 6.4% respectively.

While Greece’s CA deficit seems quite large, Ireland’s seems pretty manageable. But even this is misleading. The country with the world’s largest nominal current account deficit is the US but it gets away with it because a lot of that money flows back into the country via foreign savings and FDI and other things. Funnily enough, it turns out that the best place to spend hte dollars earned on trade is in the country that deals in dollars. (Being able to print the world’s reserve currency doesn’t hurt either.)

Of course all this is prelude to saying that current account deficits are not bad per se. The world needs some countries in surplus and others in deficit. What matters, if you have a deficit, is how you deal with it. And clearly, Greece needs to get better.

And yet, to bring it all back around, it is the case that all these countries have exceptional debt : GDP ratios. But is even that in itself a terrible thing? Japan manages alright with its absurd ratios. And it is after all debt and the trading of it that tends to finance the entire global economy. It’s just that some debt (US) tastes better than other debt (Greece). But this has as much to do with faith and actor-expectations as it does with debt ratios and other indicators.

* The reason Estonia, Slovakia and Slovenia seem so solid in this ratio isn’t because they’re somehow better money managers than their western partners, though that may very well be true. The better explanation though is that they simply haven’t had a free market for long enough to fully engorge themselves.

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