Europe's Hunger Games: Income Distribution, Cost Competitiveness and Crisis

Abstract

The dominant view, both on the mainstream right and on the left, holds that the Eurozone crisis is a crisis of labour-cost competitiveness-with trade imbalances (and hence foreign indebtedness) being driven by divergences in relative unit labour costs (RULCs) between surplus and deficit countries. To re-balance Eurozone growth, the mainstream solution is a deflationary policy of 'internal devaluation' (i.e. cutting the wage share by as much as 30%) in the deficit countries. The 'progressive' view holds that the surplus countries should adjust by raising their wage shares. We argue that both sides of this debate are wrong and unhelpful. Europe's trade imbalances are determined by domestic and world demand-whilst RULC divergences play only a negligible role. Eurozone growth can only be revived when Eurozone demand growth is restored, not by lowering wages here and/or raising them there. The current deflationary adjustment forced on the wage-led economies of Greece, Italy, Portugal and Spain is self-destructive: it is a 'confidence killer', not only deepening the free fall of southern European incomes but also damaging their productive base and productivity growth. The outlook is depressing-further increases in already high unemployment rates, inequality measures and poverty rates inconceivable in prosperous Europe just a few years ago-and arguably dystopian.

European macroeconomic imbalances at a sectorial level: Evidence from German and Spanish food industry

“…Regan (2015) argues that the existence of important differences between countries following an export-led model, like Germany, and others like Spain, Portugal or Greece following a demand-led model. To understand the differences in these two models are a prerequisite to develop and appropriate economic policy response (Storm & Naastepad, 2015). More data analysis related to particular sectors can help to understand how these macroeconomic changes affect firms in a particular sector.…”

The performativity of potential output: pro-cyclicality and path dependency in coordinating European fiscal policies

“…Even more importantly, structural change affected deficit countries in adverse ways. The export bases of periphery countries deteriorated in relation to the core, as their economies became dependent on foreign-financed imports (Storm & Naastepad, 2015a, 2015b.…”

“…While the performative impact of the political application of the EC's PO model was rather uniform across countries in pre-crisis years -reinforcing optimism only to slightly varying degrees across countries, largely independent of a country's specific growth model -, this tide turned rather quickly in the post-crisis period. In the aftermath of the GFC, countries focusing on compensating deficiencies in domestic demand via the export side faced mainly financial risks and were continually granted comparably positive assessments of their real economic development (Storm & Naastepad, 2015a, 2015b. However, those European countries that in the pre-crisis years had relied on increases in private and public sector debt to increase spending and thereby accumulated large current account deficits, were confronted with a much more intense economic downturn and a reversal of their developmental trajectories in close correspondence with the extent of their private and public sector debt overhang.…”

La crisis del euro en perspectiva

“…Una convergencia impulsada por los flujos de capitales desde el centro hacia la periferia, supuestamente instrumentales para un crecimiento de la productividad. En este marco, son necesarias las reformas por el lado de la oferta (recortar salarios directa o indirectamente, por ejemplo debilitando el poder contractual de los trabajadores), para así garantizar competitividad de precios, pero descuidando el rol de la calidad y la tecnología en la producción (Storm y Naastepad, 2015).…”