One broadly suggested policy response to the
depression plaguing the “peripheral” Euro-area countries wants the “core”
countries to raise wages and try to boost private final consumption. According
to proponents of this policy path this would boost growth in peripheral countries and ease their pain.
I do not wish to comment on how feasible
something like that is neither on whether it constitutes a morally right or
wrong policy response since it is a highly politicized issue. What I would like
to try and comment on is whether such a policy has the capacity to produce the
desired results.
As anyone that has cast even a shifting glance
to trade data for Euro-Area countries must have noticed, in most cases the
importance of intra-Euro-Area trade is diminishing.
As the
trade channel will be the transmission mechanism through which potential
benefits of this policy will spillover to the periphery, here is the chunk of
imports for Germany and the Netherlands (the two larger core Euro-Area markets)
that come from the Euro-Area.
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| source: Eurostat, own calculations |
As one can see from the chart, for both countries, the Euro-Area share of their imports is diminishing fast.
Hence, one question that I cannot help but ask
is, should this suggested policy move were to materialize, would it have the
envisaged results?
Although, when new demand is created one cannot
accurately predict where it will be channeled to, the chart above conveys two
crystal clear messages. First, the share of core countries imports stemming
from the Euro-Area is decreasing and second, for both the countries featured in
the chart, the said share currently lies below 40%. Hence, such a policy would
first and foremost benefit non-Euro-Area countries and not the periphery.
The other side of the coin is to look at the
direction of peripheral countries exports’ flows. Here’s the chart.
 |
| source: Eurostat, own calculations |
It seems that according to this metric, out of the
three countries featured in the chart, Spain stands to benefit more, followed
by Italy, while out of the three, Greece would reap the less benefits.
This particular data point makes, always in my
humble opinion, implementation of such a policy mix even more unlikely, since
should a proposed policy be likely to produce uneven results and distribute potential benefits
asymmetrically doesn’t this make it less desirable?
Finally, one last point that questions the extent
that such a policy would be beneficial to the peripheral countries is the fact
that private consumption (and not exports) represents the lion share of their
GDP. What’s more in all peripheral countries
(Greece, Ireland, Italy, and Spain) the external sector is not large enough to compensate for plummeting domestic demand. The next graph portrays that pretty vividly.
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| source: Eurostat |
According to this metric as well, potential benefits would once more be the least for my native Greece, whose external sector is miniscule.
To wrap this up, the policy proposition which
claims that should core Euro-Area countries implement expansionary policies
this would have major beneficial effects on the periphery, leaves a lot to be
desired in my humble opinion. One cannot control where
newly-created demand from incremental final private consumption will be channeled
to. On the other hand one could control where incremental public consumption
would flow but how possible is something like that happening in such an
international environment? I do not claim that this policy will lack any
expansionary effects, I just think that there are other policy alternatives
that would give policymakers more bang for their buck (or Euro if one wants to
be literal)…
P.S. Here's the chart about private final consumption.
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| source: Eurostat |
