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terça-feira, Janeiro 31, 2012

Pas comme les Américains

What America has got that Europe has not

A recent study by McKinsey Germany on The Future of the Euro highlights the lack of adjustment mechanisms within the Eurozone, in contrast to other currency zones like the U.S. How is Europe not like America in a crisis? 

The Single Market and the Single Currency  have done away with  independent FX,  monetary and  trade policies, they have eliminated capital controls, but have not activitated the alternative adjustment mechanisms of real wage flexibility, capital and labour mobility, and fiscal transfers.
  • Unit labour costs rose only 2% in Germany but 35% in Greece in the 2000-10 period
  • In 2008, interstate migration was only 0,18% within the EU, a fraction of the 2,8% internal movements in the US. 
  • In 2009, fiscal transfers represented only 0,1% of GDP within the Eurozone, compared to 2.3% in the U.S. 
But there are other  differences which make adjustments more painful within the Eurozone than in the US:
- Language differences keep workers at home or in menial jobs.  Portuguese pre-engineering students have little access to German language classes, which are scarce, costly and reserved for humanities majors.  That should sell well in Munich.
- There's is no FDIC, no federal  EU wide deposit insurance fund, so local depositors investors in distressed countries   have been sacrificed and are busy moving funds into Deutsche Bank branches or to Switzerland. 
- There is no Eurozone wide bankruptcy law to protect overleveraged borrowers and to force overextended creditors to share in the sacrifice of develeraging though an orderly default and debt workout.  In the US, subprime borrowers are able to walk away from their hopeless mortgage burdens through "short sales" of their houses
- There is no European Eximbank, to finance and help promote the exports of the weaker Eurozone members, whose fragile export sectors are starved for funds.
- Prudential bank regulation is the responsability of national central banks, which may have incentives to protect local banks, and local taxpayers, rather than the Eurozone financial system as a whole.
- There is no EU-wide Medicare needed to ensure that pensioner health care is paid by all  the EU taxpayers instead of burdening the taxpayers of the Club Med countries.  Imagine if Florida taxpayers had to pay most of the health care for the "snowbird" retirees.
- Under EU public procurement rules, "the Laird is not allowed to buy local" and there are no Small Business SBA setasides in Government  contracting for small companies to help atenuate the impact of economies of scale and scope.
  
- Unlike the 50 States of the US, smaller European governments like Greece borrow heavily to import military goods form the larger countries like Germany 

- Europe has no bi-cameral parliament where legislation requires a majority of the lower chamber, based on population AND of the upper Senate chamber where even the smaller states have two votes. 
Even this quick desk review of "how Europe is NOT like America" serves to identify some of the things that could be done to reverse the  growing divergence of fortunes in Europe, but the winners may have little incentive to do it until the horrendous costs of divergence touch them as well.

Mariana Abrantes de Sousa
PPP Lusofonia
See also: Ratings downgrade cascade  through the Eurozone 
Eurozone crisis tests the limits of divergence 
Of banks, central banks and moral hazard 
Things that  the Troika should have thought of 

8 comentários:

What Europe could learn from America disse...

However, there is one crucial distinction ...

Back in the summer of 2011, when US default loomed, the senior managers in the largest banks spoke extensively with each other about their preparations.
...
In Europe today, however, it appears that there is little – or no – similarly collaborative move.
...
But nobody appears to have spoken extensively to anyone else, far less to any central government group.
...One problem is that the banking landscape in Europe is far more fragmented than in America.

Payment default within a monetary union disse...

When the Texas economy crashed in the 1980's and Texas bank went under, was there any talk of Texas leaving the (monetary) Union?

To link payment default to exit from the single currency is to create a bogeyman.

Tax sparing benefits promote cross border lending disse...

German banks had tax incentives to lend abroad.
German creditors received tax sparing benefits for Withholding tax deemed due in Portugal, even when no taxes were actually paid.

US Brothers in arms disse...

Here's an interesting historic observation:

The United States was created by a group of states which had just fought a war side-by-side.

The precurser to the European Union was created by a group of states which had just fought a war against each other.

Woody Woo disse...

Paul Krugman volta a Portugal a 27-Fev-2012

Verão de 1977, Avenida da República em Lisboa. Uma equipa de estudantes do MIT liderada por Richard Eckaus estudava soluções para a economia portuguesa que na altura estava a ficar sem reservas para pagar as suas exportações. Da equipa faziam parte Paul Krugman, Kenneth Rogoff, Jefrey Frankel, Miguel e Rudiger Dornbush.

Anónimo disse...

Europe has no Europe wide pension scheme, like the US Social Security.
Workers who move countries may loose pension benefits.

PPP Lusofonia on EU Deposit Insurance disse...

Now that European banking authorities are considering a Eurozone (or EU wide) deposit insurance scheme to guarantee and stabilize local deposits and local funding in the Eurozone banking systems, you may recall that you read it here first, in the blog PPP Lusofonia, on 31-January-2012.

Europe's private sector debt crisis disse...

How is Europe not like America, in a pinch?
I counted nine ways where the European economy is more hidebound, including the poor credit workout arrangements, in my article of 31-Jan-2012, as you may see in http://ppplusofonia.blogspot.pt/2012/01/pas-comme-les-americains.html

"European bankruptcy law less debtor-friendly than America’s" means that the burden of the credit errors falls too much on the debtors, and that creditors have little incentive to refrain from over-lending. If worse comes to worse, just pass the dud loans to the hapless taxpayer. Isn't that moral hazard?

Instead of debtors' prisons and indentured service, we now have real wage deflation in the debtor countries, pushing up the real debt burden to tragic, yes tragic,levels. All of this to protect the "banking system", or more precisely to protect bank shareholders and (im)prudential regulators from the excesses of lenders allowed to run amok. The same central bankers who regularly lecture the taxpayers who are footing the bill...