James Anderson writes from Tucson: Sunny states, they say, are less competitive than those in the cold north. A comparison of Greece, Ireland and Spain (GIS) and Florida, Arizona and Nevada (FAN) provides some answers. All of these places have had a spectacular property bubble and bust. All of them continue to suffer severely from the after effects of the crisis which began in 2007.
Seventeen countries of the European Union form the Eurozone and fifty states use the US dollar. Hence, the euro is only in its infancy. The dollar zone has evolved to the point where there are automatic federal transfers to help in emergencies. In the Eurozone, painful and protracted negotiations are needed to achieve a financial rescue. This money is then added to the national debt of that country.
Not surprisingly, the gulf in per capita Gross Domestic Product between the rich and the poor in the EU is much wider than in the US. In the latter the highest per capita income is in the District of Columbia (DC) with almost $175,000 per person. However this is totally artificial as Washington is the nation’s capital. Among the rest, the most prosperous is Delaware with almost $70,000 per capita. The poorest is Idaho with about half of this. Hence the system of federal transfers has ensured that there is no yawning gulf between rich and poor states in the US.
The situation in the EU is totally different. Bulgaria is the poorest, followed by Romania. Luxembourg is the richest. Per capita income in Luxembourg is over sixteen times that of Bulgaria and Romania. The gap in the Eurozone is much smaller. The citizens of Luxembourg have about seven times more than those of Estonia. Greeks have about a third as much as Luxembourgers but about half of what Germans enjoy.
The above reveals that the European Union is made up of two groups: the rich and the poor. Those outside the Eurozone are normally much poorer than those in it. However those using the euro still act as sovereign states with their own central banks. Each prints euros but with a different prefix. X denotes German euros and Y Greek. Needless to say those in the know when buying euros ask for X euros. Greece might have left the euro before they have been able to spend their Y euros which would immediately devalue.
GIS and FAN both experienced trends which diverged markedly from the Eurozone and the United States respectively. Between 2000 and 2007 GDP growth in GIS was up to 3.4 per cent higher than the average for the Eurozone average. However the fall was even deeper and there has been no sustained recovery. Greece is now the worst off.
FAN recorded up to 2.4 per cent annual growth above the US average but the fall was greater than the US average. They are now recording growth but their GDP is still up to 9 per cent below the 2007 figure.
Automatic fiscal stabilisers – lower tax liabilities, food stamps, unemployment insurance and so on cushioned the shock in FAN. They may have amounted to 40 cents in every dollar decline in state GDP. In addition, Washington’s fiscal stimulus helped the poorer states more than the richer. In total, federal transfers contributed about 5 per cent to states’ GDP.
There is nothing comparable in the Eurozone. Transfers are added to the national debt and exacerbate the financial situation. During the crisis FAN credit ratings have not suffered whereas GIS ratings have plummeted. The main reason for this is that state spending in FAN is about 12 per cent of GDP whereas in GIS it is over 50 per cent. Hence debt as a percentage of GDP in GIS ranges from 143 per cent in Greece to 70 per cent in Spain. In FAN it is less than 5 per cent.
The crisis in GIS owes little to the inflexibility of labour markets but more to the absence of central transfers. The gulf between labour costs in the Eurozone – 25 per cent between Germany and Greece – does not exist in the US. In contrast, hourly wages in FAN are about 10 per cent less than the US average.
What is the conclusion of the above? Without the ability to devalue there is no way GIS can become competitive in the short term. This applies even if the banking and sovereign debt problems can be sorted out. The much healthier situation in FAN is due to automatic federal transfers. The way ahead in the Eurozone is clear: Germany, Luxembourg and other rich countries will have to give money to the poorer states. If they do not, the Eurozone, in its present form, will blow up.