Changing the narrative. Inequality as a cause for the Euro conundrum.
from Merijn Knibbe
If this post is right there is a relation between inequality and the Euro problems. According to the post, high inequality leads to deficits on the current account (an idea vindicated by the ‘plutonomy reports’, see the posts obout these on this blog!) while, especially in former authoritarian countries, tax systems are designed to minimize the tax burden of the rich – which makes it hard for governments to change this ‘structural-deficit-situation’. Is there something to this line of reasoning? Is it a viable alternative to the mistaken view that government deficits (which did not exist, prior to 2008, in Ireland and Spain…) caused the crisis? According to the graph below there is.
The graph, based upon Eurostat data, shows total disposable income of the richest 20% of households divided by total disposable income of the poorest 20% of households. A high level means that inequality is high (the richest 20% in Romania earned seven times as much as the poorest 20%). The graph shows that inequality was high in Italy, Spain, Portugal, the Baltic states as well as in the UK, Bulgaria and Romania. Almost all these countries experienced large currency problems and had to be bailed out, at least when they either used the Euro or had a Euro-peg. Countries whith low inequality generally did have much less problems or were even booming (Sweden!). The idea that inequality has something to do with deficits on the current account and Euro problems clearly squares much better with the facts than the neo-liberal ‘government deficits in these countries were too high’.
Beware! Quite a lot of these rich might well be government employees. According to Eurostat, industry wages in Italy, Greece and Spain are about 60 to 75% of public sector wages, in Germany industry wages are higher than public sector wages… But again, Spain did not need to borrow to pay these wages and neither did Italy (which, hard to believe but that’s what the IMF states, has a primary surplus in 2011. A primary surplus means that when you do not pay interest on your debts you can still pay all government employees and finance all government investments. For Italy, default is a viable option, surely when it increases taxes a bit). Highly paid government employees may have been part of the cause of the crisis – we should not rule this out. Lack of fiscal discipline didn’t (at least not in Spain, Ireland and even Italy).