Chronicles of the Second Great Depression (4). Price levels 1995-2011.

Eurostat has recently published new information on price levels in the Eurozone, in the EU and in the EU plus ten additional countries of which Turkey is the most important. Stunning. The graph shows the “variation coefficient of price level indices of final household consumption expenditure, 1995-2011″. Such coefficients increase when differences become larger and decrease when differences become smaller. The most remarkable aspect of the graph: After 2008 the Eurozone coefficient continued to decrease, while the EU coefficient (including the Eurozone countries!) stalled and the one also including the extra countries increased. For better or worse: the Euro works. Convergence keeps taking place.

Variation coefficient of price level indices of final household consumption expenditure, 1995-2011

EA 17 = Eurozone
EU 27 = Entire EU
All 37 = Entire EU plus 10 additional countries, Iceland, Switzerland, Norway, Turkey, Montenegro, Albania, Bosnia and Herzegovina, Macedonia, Serbia, Croatia. Within some years, some of these countries will be members of the EU.

Declines were expected as it was expected that poorer countries would catch up, which among other things would lead to higher wages which directly and indirectly translates into higher price levels (some wages, like those of auto mechanics, are more or less directly billed to consumers. The same holds for ‘mixed income’ of dentists or hairdressers). According to many, this convergence has however been to fast, which was financed by capital flows which enabled higher incomes in Southern European countries. But that’s not the point at this moment: the decline within the Eurozone even continued after 2008, when flows of private capital reversed. At the same time, differences in the entire EU stalled. And differences in the 37 countries sample even increased. The devaluation of (already cheap) Turkey and the revaluation of (already expensive) Switzerland might have something to do with the last development.

But with regard to the Eurozone, the hypothesis that the Euro-system itself unleashed developments which despite the best efforts of economists and politicians still lead to ever smaller differences in price levels without offsetting changes in productivity power, monopoly positions, world-class clusters of companies with world-class employees and a well-organized state and the like can, at this moment, not be dismissed. If this developments can only be counteracted by massive, permanent income transfers – Germany will opt out. I’m not kidding. If the real Italian problem is not technology or export sectors or sclerotic markets but increasing corruption and the succesful business model of the maffia (the economic consequences of mr. Berlusconi), as Daniel Gross indicates, we’re just wasting time. Lowering wages and increasing unemployment will only increase the structural problem.

(Plenty of other options of course, like legalizing marihuana (only the variety cannabis sativa Όλυμπος of course) and making it an official EU ‘Greek agricultural specialty’. But somehow I’ve the idea that Mrs. Merkel won’t approve of this and would give up on the Euro – as this would be a kind of transfer union, too, even though the monopoly profits would this time be cashed by legal companies and the state instead of organized crime).

About these ads