Meanwhile, in Europe… (13). Earnings and internal devaluation

from Merijn Knibbe,

Recently, Eurostat published 2006 data on earnings (read: wages). What does this rather old information tell us? First, I’ll give some information on the data and add a little historical comparison to the Eurostat stuff. After this, I will investigate what these data mean for the present discussion about German European Economic Policy.

1. Data

• Differences within the EU are large. I mean: large. Denmark knew the highest average hourly wage (€22,36). This was about twenty times as high as the 1,11 of Bulgaria.
• Differences within the Euro area (17 of the 27 EU countries) were, in 2006, much smaller – but they are increasing. The highest Euro wages were paid in Ireland: €20,86 (remember, this was 2006). This was ‘only’ three times as high as in Portugal (7,–). After 2006, differences have however increased, as a new Euro country like Estonia had a Euro wage of only 3,50. Increasing differences mean that it will become even harder to maintain the Euro.
• Relatively high industry wages do not prevent a competitive industry – to the contrary.  Looking at the Eurostat sectoral data (Industry; Commercial services; Education, health, social and personal services) it turns out that Industry wages in countries with a modern, successful, competitive industrial sector (Germany, the Netherlands), Finland, Sweden) are higher than wages in “Education, health, social and personal service activities” while the contrary is true for countries like Greece, Italy, Spain and Portugal. Relative industry wages (Industry wages divided by Education etc. wages expressed in an index) in Germany are 105 and in the Netherlands 115 while the comparable wage in Greece is 74 and in Italy even only 64. Oddly enough, nominal Italian industry wages are way lower than in Germany (-34%) while Italian “Education and health” wages are actually higher than German ones (+8%).
• Historically, Eastern European wages are surprisingly low. In a long term perspective, it turns out that 2006 wages in many Eastern European countries are not only low in a comparative perspective but also in a historical perspective. I deflated 1913 and 1950 nominal German, English and Dutch wages expressed in Dutch cents with the Dutch consumer price index. Bulgarian wages in 2006 are half the already low real Dutch 1913 ones, Polish and Estonian wages are not higher than German real wages of a century ago and clearly lower than western European ones in 1950.

 

Industry, real hourly wages, euro cents of 2006
	1913	1950	2006
Bulgaria			107
Poland			375
Estonia			350
The Netherlands	202	384	1748
Germany	367	432	1732
United Kingdom	642	603	2003

 

Sources: Eurostat; Centraal Bureau voor de Statistiek; Van Zanden, J.L. and R.T. Griffiths, Economische geschiedenis van Nederland in de 20^e eeuw (Bussum, 1989) p. 21.

2. Analysis

Euros are getting scarce, in countries like Greece, Italy, Spain and France as well as in quite some Eastern European countries. Credit is less easily available than it used to be and many Euro countries run deficits on the current account (France, Italy, Greece and Spain having the largest ones in an absolute sense). At the same time, the European Central Bank is actively soaking up what it sees as a dangerous ‘overhang’ of liquidity in the monetary system (more or less the opposite of QE2 in the USA, in fact).

            At the same time, many of the deficit countries are supposed to pay back debts, debts which in some cases (Spain, Ireland) do not even originate in the government sector but in the private sector. Where does the money have to come from?[1] Austerity-ideology states that countries have to slash wages as well as the cost of government and have to export themselves out of trouble, effectively using the increase of surplus income either to pay high interest rates or to pay back debts. But even if such a policy succeeds (which requires that Greece runs a 10% of GDP current account surplus, or about twice the German one), it will take time, lots of time.[2] Looking at the current accounts and the trade balances of the EU deficit countries, I do not see any kind of fast and dramatic changes for the better, not even in countries which are experiencing the harshest internal devaluation ever tried: the Baltic States. Their combined trade balance deficit is actually increasing, while their current account surplus shows signs of decreasing. Austerity is clearly not yet a success, not even when we take the point of view of foreign creditors. Countries like Greece, Ireland, Spain and Portugal rapidly become more indebted, despite Austerity. So, again this question: where does the money to pay back debts have to come from? Slashing wages even further?

            My idea: if countries which, like Estonia and (outside the Euro area) Bulgaria and Romania, have full access to modern technology like trucks and GPS systems and air tires and roller balls and highways and electric light and telephones and antibiotics and vaccines and computers 

• can not compete with northern European countries even despite wages which are lower than those paid in 1913 Germany en England, when all these productivity boosting technologies were either not available or in their infancy
• they also won’t be able to compete when wages are slashed even further

It’s, in the end, not about low wages but about modern competitive export oriented sectors (I do not write “companies”, as export success does not only depend upon individual companies but upon efficient and effective clusters of specialized companies). The German and Dutch and Swedish and Finland examples are clear: such sectors even pay wages which are even higher than the national average. And the export clusters go back many decades and even centuries: exporting is not an easy thing to accomplish. The debtor countries don’t need low wages and ECB blood-letting, they need blood transfusion: more direct investments, less capital flows; more technology, less finance; more money, less debts; more (internal) competition, less external coercion; less selling of assets, more genuine market development. That will take time (about twenty to thirty years). And it will only happen if either quite some debts are restructured or when the European Bank buys debt (which won’t happen). And yes, the 10% a year wage increases in the Euro periphery which will accompany such prosperity oriented policies will lead to higher EU inflation-as-we-measure-it. Not a problem – but a sign of increasing prosperity (as this peripheral inflation does not necessarily mean that prices in Germany will increase, too).

Well, I guess that if this won’t happen, the debtor countries will increasingly export their people and change to a cash economy – dollars, if Euros are not available.  But some good news too: Estonia is (with 2% of the market) the worlds second largest supplier of rare earths – which suddenly is an amazing opportunity: http://www.spacemart.com/reports/Estonias_rare_earth_break_Chinas_market_grip_999.html

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[1]Greece is at the moment of course pressured to sell its government companies before it defaults

[2] A prosperous society of course does not only need an exporting sector, but also (and often even more) high-class health care, effective government, an efficient and effective educational system, good roads and whatever.