Transcript SEMINARI Economic relations between UE and Southern

Alternative economic policies in Europe
Pavia, April 24-25, 2015
Annamaria Simonazzi
and
Andrea Ginzburg
Core periphery relations in the Eurozone:
a Southern European perspective
The German-South Europe divide and the changing inter-regional
(but intra-European) trade *
* A. Simonazzi, A. Ginzburg, The interruption of industrialization in Southern Europe: a centre-periphery
perspective
*see also A. Simonazzi, A. Ginzburg, G. Nocella, Economic relations between Germany and Southern
Europe, CJE, May 2013
Outline
• The debate on the crisis
• A long term perspective: the interruption of
industrialisation of late-comer countries
• Restructuring: core vs. periphery
• The medium term: change in the core country’s
model
• Adjustment policies:
– Expansion of domestic demand in the core
– internal devaluations in the peripery
– productive structure diversification (industrial policy)
At the origin of the crisis
• a faulty EMU construction
"without prior constitution of a unified polity and a common balance of
payments, there is no monetary regime, established among the potential
participants in EMU, that could be regarded as irrevocable” (Pivetti 1998)
• based on a faulty theory
Disregard for the differences in development across Member States:
Countries differ only for their inflation preferences so that one size fits-all
policy (price competitiveness) can suffice
• Lack of a “fiscal” (that is, industrial) policy to
reduce the differences in development
Germany’s current accounts with the Eurozone
countries (€ billion)
Source: Lehndorff (2012)
The euro crisis: a standard BP problem?
Persistent German surpluses translate into persistent
deficits of the euro periphery.
Two different interpretations:
1. price effects-The ‘culture of stability’: German
surpluses reflect its virtuous behaviour and periphery’s
deficits their profligacy
-Relative prices (and wages) must adjust (downwards)–
Fiscal consolidation to obtain an internal devaluation
2. income effects- Fallacy of composition implicit in the
internal devaluation export led strategy.
German excess of S>I imply other European countries I>S
-Productivity vs. competitiveness achieved by wage restraint
-“current-account surpluses are as much a reflection of the
economy’s domestic weakness as of its external strength”
(Whyte, 2010).
-German wages and prices must adjust (upwards): German
internal demand: reflationary policy
Beyond the short run
Two questions
- Is the lack of price competitiveness of the periphery vis-à-vis
Germany the real problem? And will a change in relative
prices be enough to restore the equilibrium?
- will a German reflation be sufficient to bring about an
increase in periphery’s exports large enough to re-start
growth?
Michael Best (2013) on product led
competitiveness
• “Product competitiveness, rooted in limited production
capabilities”, is much more important than price
competitiveness.
• “The absence of the concepts of productive structure
and product led competitiveness from public discourse
and academic economic analysis deflects ‘growth’ policy
away from its proper focus”.
• “the evidence is abundant that peripheral economies
suffer from a dearth of business enterprises that meet
the performance standards required to compete and
grow in the Single European Market”
The interruption of the industrialization process in
the periphery: a long term perspective
Late comers vs older industrialised countries
• Fuà, Problems of Lagged Development in OECD Europe. A study
of six countries, 1980
• technological gap,
• the demonstration effect on consumption,
• the challenge of competition from more developed countries
• These differences translate into strong internal productivity
differentials across industries and regions (‘dualism’), serious
difficulties in providing regular employment to the potential labor
supply, higher propensity to price instability and public deficits,
and “a peculiar fragility of the balance of payments”.
Per-capita GDP at constant prices
Share of industrial employment in
total employment
19601968
19681973
19741979
19801989
19921998
19992007
20082013
Germany
47,7
47,9
45,1
41,3
36,8
31,7
28,5
Italy
36,4
39,1
38,5
34,7
33,6
31,3
28,6
Spain
32,7
35,6
37,2
33,3
30,5
30,2
22,9
Portugal
32,2
33,4
34,0
35,4
32,9
32,6
26,6
Greece
19,9
25,4
28,9
28,3
23,8
22,3
18,8
The service transition in Southern Europe: a case
of “incomplete modernization” due to pre-modern
traits?
• According to Sapelli (1995), in Southern Europe ,
obstacles to the completion of the industrialization
process would derive from the prevalence of cultural
values and power systems based on status and
clientelism, with respect to those based on contracts
“typical of societies were market economy has
prevailed. The Weberian capitalistic society is the
ideal example. However this model has had little
success in Southern Europe”.
• But why the industrialization process started in the
first place, and why the arrest took place precisely in
the 1970s?
The 70s: the importance of market
saturation in the major economies..
• Production for replacement: strong differentiation of
brands, vertical differentiation, shortening of products life
• competition in differentiated products
• Selective cost competition: delocalisation of production
phases (in the peripheries); OPT, increasingly assisted
by ICT
• ‘Services based’ sales strategy
• Strong expansion of finance services
• Pressure to deregulate capital movements
Winners and losers in restructuring: the core
• The crises of the centre (for simplicity, here, Germany), lead
to internal reorganizations of its production structure
• In the centre we assist to a strong drive to reorganize a
wide range of manufacturing and services operations.
• The centre succeeds in strengthening its ability to stay in the
market in the product-led competition thanks to processes of
'creative destruction’ and reconstruction, undertaken in the
crisis with the support of industrial policies.
Winners and losers in restructuring: the
periphery
• Higher weight of sectors subject to stiffer competition of
emerging economies (steel, shipyards, textiles).
• Higher volatility of Foreign Investments
• Premature liberalization
• The restructuring of the core deeply affects the countries of
the periphery.
• Firms struggle to adapt to the new environment
(dominated by deflation and quality competition)
• They fall behind and, also as a consequence of their policies,
implement what might be called a 'plain destruction' of their
capabilities to create new products, market niches and
markets.
The paradox of a “consumer society without
a production base” (Fotopoulos, 1992)
• The crisis opens a gap in aggregate demand, eventually filled
with welfare and costruction expenditure: restructuring without
industrialization
• The 80s: welfare and debt led growth
• Faced with the challenge of “expanding the development
role of the state, by adopting a radical restructuring
program” (Fotopoulos 1992), the governments of
peripheral countries, confronted with a deep fall of
private investment, withdrew, expanding instead the
consumption function of the state, with the double
objective to avoid a massive rise in unemployment and
to reproduce the consumer society.
• The ‘peripheral tertiarization’ based on construction and
welfare finds increasing difficulties to reverse the
hardships of a limited and dependent accumulation
Medium Period: three hypotheses to explain the
periphery’s crisis
Persistent disequilibria cannot be explained (solely) by
price competition
Changes in Germany’s economic model (since the mid
‘90s)
• East-ward enlargement and trade diversion:
the rise of trade in intermediate goods weakens the ties with
Southern periphery
• Quality of German foreign trade, and relation between
imports and income distribution
• The new German specialisation model is associated with
the hollowing out of the productive fabric of the periphery
industrial districts, big MNCs (Spain), but insufficient to activate
links and ensure full employment and long-term sustainability
Increasing skewness of the trade matrix within the euro
zone
Restructuring of the German economic model
a) labour market reforms
• “core” export industries: corporative institutions
• Other sectors: ‘orthodox’ labour (and welfare)
policies
• The result: increase in wage inequality and in
working poor (higher share of low wages)
• Increasing poverty rates
b) Changes in the direction and composition of
trade: the rise of intermediate imports
Delocalisation of German industry to the
East:
diversion of trade from the South.
Low growth of the euro area did not help
southern countries to diversify (contrary to
the Eastern periphery)
Germany-Central Europe supply
chains
Source: Stehrer, 2015
Spillover effects from a German expansion?
• Should the core expand to help the periphery? Yes
is this enough? no
• Econometric results: public investment would benefit German growth, but
only a much smaller effect would trickle down to peripheral countries
• The pattern of growth matters: different components of demand
have different spill-over effects across EU areas (e.g., exports vs.
domestic demand)
X-led growth favours CEEC, which are specialised in intermediate
goods, much less Mediterranean countries, specialized in consumer
goods
a German domestic-demand expansion favours imports from a
much larger geographical basis (imports of low quality Asian
consumption goods)
Spillover effects of a German
expansion
• It is true that more buoyant demand in Germany would
help economic rebalancing in deficit countries through
the direct and indirect effects
• but their export base is at the moment too narrow to
sustain a development driven only by external
demand
• A more fundamental objection: an export-led recovery would respond to
the composition of imports (and the objectives) of the importing country,
and the latters do not necessarily coincide with the ones needed for the
development of the peripheral countries
• This policy risks to reproduce the same dependent development of the
past decades
Quality of trade and price
competitiveness
• Domestic devaluations?
• labour (and price) flexibility are unnecessary or
counterproductive if the underlying problem stemmed not
from price competitiveness but from "product
competitiveness, rooted in limited production capabilities”
• Ambiguity of aggregate price deflators: different price indexes
lead to different measures of competitivenes (Bayoumi et al.
2011)
• Price competitiveness implies homogeneity in the basket of X
• Development is associated with diversification more than cost
competitiveness
Indicators of real exchange rate: Italy 1995-2009
Product Complexity and Export
composition
Proxy for product complexity: diversification of the country’s X structure and
ubiquity (an index of worldwide diffusion of the production) (Felipe and
Kumar 2011)
Share of world exports by complexity:
Top 10 products
Germany
12.24
Italy
1.40
Spain
0.23
Portugal
0.05
Greece
0.01
The Network of Trade in the Eurozone
1999
2008
“The persistent intellectual confusion
between austerity and reform” (A. Sen)
• Centre: industrial policy+ lower interest rates+
exchange rate devaluation
• Periphery: Global Financial Crisis--Debt/Y
• Austerity–(higher D/Y)lower investment
(private and public)hollowing out of the
productive matrix--lower resilience to the next
systemic crisis
The fiscal crisis increases the future divergence
between core and periphery: the North-East/Southwest divide
Source: Own calculation on Eurostat data,
http://ec.europa.eu/eurostat/tgm/download.do?tab=table&plugin=1&language=en&pcode=tps00158