Thursday, 16 December 2010

Euro rumblings (part 1)

One of the structural problems that Europe is facing is the divergence in competitiveness between core countries and the Euro - periphery. But is that so or is it just a popular myth ? Maybe a look at actual data will tell us.

source : ECB

The graph shows inflation rates for Holland and Euro area as a whole. Almost for the whole span of the decade, the rate for Holland was lower than the one for the Euro area. That is the definition of a real depreciation for Holland against its most important trading partner and demonstrates the fact that Dutch products became more competitive. The one factor that could lessen the impact, nominal currency appreciation for Holland, is simply out of the question, since both areas have the same currency, the Euro.

This is a very crude way to support this argument but that doens't make it any less valid. The inverse dynamic can explain the situation for Greece. The following chart shows inflation rates for Greece and Euro area as a whole.

source : ECB

As it is made clear by the chart, the inflation rate for Greece was higher than the one for Euro area as a whole for the length of the 2001 - 2009 period. That constitutes a real appreciation for Greece, which translates into a loss of competitiveness for Greek products against those of its main trading partner.

But even if we picture a single country and its provinces, as far as internal trade is concerned, some of them would face a trade surplus and some a deficit. But since we are talking about a unified country where people are bound by a common language, common historical and cultural heritage, tensions between provinces do not arise often (at least in most of the cases). In Europe, where every country has a separate cultural and ethnic identity this is probably not possible. What would happen in the unified country is that less competitive provinces would face migration outflows towards more competitive provinces. In Europe though, labor mobility is actually negligible, now isn't it ? If Europe wants to become a fully integrated economic and political country it must first become an actual country. That of course takes time and cannot be achieved overnight. History is full of failed attempts to do so...

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