Greek Tragedy

(guest post by Michael Burke)

Today’s Financial Times carries an interesting piece from Martin Wolf on the severe difficulties being faced by Greece as it attempts to come to terms with its current economic crisis. http://www.ft.com/cms/s/0/eeef5996-0532-11df-a85e-00144feabdc0.html

The FT’s veteran commentator places Greece’s plight in the overall context of developments within the EU, and so has something to say about Ireland. Without minimising the problems of any country, he clearly shows that it is Greece which is an extreme case, not, as is often claimed here, Ireland.

“The problems of Greece are extreme, because it alone of the vulnerable eurozone member countries has both high fiscal deficits and high debt. Other countries with large fiscal deficits are Ireland (12.2 per cent of GDP in 2009) and Spain (9.6 per cent). But, while net public borrowing was 86 per cent of GDP at the end of 2009 in Greece, according to the OECD, in Ireland and Spain it was only 25 and 33 per cent, respectively. Meanwhile, Italy, with a net debt ratio of 97 per cent, had a deficit of “only” 5.5 per cent. Portugal is in the middle, with net debt of 56 per cent of GDP and a deficit of 6.7 per cent of GDP. Thus, the challenge for Greece is larger and more urgent than for the others.”

He also warns that those pinning their hopes on export-led growth are in perliously crowded boat in choppy waters, as they now comprise (at least) 70% of the world’s economy.

Finally, he has a very illuminating chart of unitl labour costs based on OECD data. Although the chart is small, the trend for Ireland is clear and unmistakeable. Ireland has already experienced a sharp reduction in unit labour costs relative to Greece, Italy and Spain. Of course, Germany is an outlier, with unit labour costs way below that group. But, although it isn’t stated by Martin Wolf, that’s based on the much stronger growth of German investment.

30 replies on “Greek Tragedy”

Nice timing. Just now:

*IRELAND’S WHELAN (oliver whelan, ntma) SAYS IRISH BONDS NOT AFFECTED BY GREEK CRISIS
*IRELAND’S WHELAN: MKTS DIFFERENTIATE BETWEEN IRELAND AND GREECE
*WHELAN SAYS IRELAND HAS TAKEN `ACTION’ ON DEFICIT

Re export led growth recovery: the Greek economy is relatively closed and its exports equal only 28% of its imports. An ‘export led recovery’ aint gonna happen anytime soon.

I read an interesting piece this morning which suggested that ultimately Germany and their incredibly high productivity and low factor costs are making them the odd one out in the Eurozone, and not the likes of Ireland, Greece or Spain (i know its been stated on here before, just saying i read a good piece on it today!). As such, for the Eurozone to recover, we need Germany to leave and not the others.

There is a well flagged problem of low-consumption/low-inflation with Germany here. Given its weight, Germany by definition can never be an ‘outlier’, as it drags the overall average with it.

Prior to the crisis, German inflation averaged less than 1.5%. To allow adjutment in the periphery, German inflation for the next few years will have to average (perhaps) 2.5%, to allow the Euorozone as a whole to stay around the 2% target.

There are no signs that this happening. The change in the price level over 2 years to Nov is as follows:

Spain 2.8%
Netherlands 2.6%
Italy 3.6%
Ireland -0.8%
Greece 5.2%
Germany 1.7%
France 2.4%
Finland 4.9%
Denmark 3.7%
Belgium 3.2%
Austria 2.9%

Aside from Ireland, the next lowest rise in inflation was Germany! This make the proce of adjustment for Ireland more difficult, though at least we are doing our side of the bargain. The other PIGS aren’t.

Mr. Wolf’s figures on net debt do not appear to be correct. The figure of 25% of GDP appears to be from 2007. In 2008 the figure was 33% and in 2009 38% (according to the NTMA).

Rather magical that 2008-9 move, given borrowings of 35bn and a decline in GDP of 7.5%

And net debt is a really, really poor thing to calculate debt ratios on. When you’d need to liquidate those assets that have the netting effect is when they’d be worth least. Aside from the volatility, it gives no idea of the cost/income ratio – what is the cost of total debt versus the income you gain from your offsetting assets? Net debt is the extension of the gross idea that the equity you have in your house is an asset, even though you are still living there. You might aswell argue that the budget deficit doesn’t matter because the government could just close down health and education if they had to…

It’s a good thing those 7 bn of shares in AIBoI, the investment in Anglo &c are worth so much…

Re inflation, as Ronnie points out, we seem to be on the right side, but this highlights movements in, rather than the absolute values of, price levels. Can we continue to ignore these?

Re the Eurozone and current account balances, it looks like Ireland, with projected CA surpluses, will be on the German (right side?) of things, but is this not fuelling a continuation of the Eurozone imbalances that led to the current crises in the PIIGS?

Re net debt, do we not have to factor in NAMA – it appears the markets have already? And looking forward, bank recap?

@Paul Hunt
“Re net debt, do we not have to factor in NAMA – it appears the markets have already? And looking forward, bank recap?”
NAMA debt is offset by the assets it holds. As it is slated to make a profit, this profit can be recognised in the carrying value of the assets, therefore NAMA reduces the net debt figure further.

As the bank recapitalisations are investments and we are at the low point of the economic cycle (everyone that we listen to says so, so it must be true) we can reasonably expect these investments to increase in value. This reasonable expectation can be quantified and recognised in the value of the investments increasing their carrying value and again reducing our net debt figure.

The more indebted we get in gross terms, the lower our net debt figure goes…

@YM,

Thank you. I do understand the import of the points you make. What I suppose I am looking for – and something which I’ve raised previously – is an outline of the State’s balance sheet and an indication of pro forma income and funds flow statements that are broadly compatible.

@Paul
I presume you’ve seen:
http://www.budget.gov.ie/Budgets/2010/Documents/Final%20SPU.pdf
?

Table 1H is the best income/expenditure summary I’ve seen so far.

Nothing so far gives any idea of the flow of funds into/out of the NTMA. In 2008, for example, 653 bn passed through their doors. This, so far as I can see, is not broken down in any way. I believe this would be essential to seeing income/expenditure profiles?

This cliché “Greek tragedy” is almost as ubiquitous as “the thin end of the wedge” was once for Irish politicians.!

As regards export-led growth, there is seldom a distinction made between selling commodities at a world price and grafting to open new markets for finished goods.

@YM,

Thank you again. I already have this document. And you are correct about the need to understand more about the stock of assets and liabilities (and movements in these) managed by the NTMA. But we still need some stab at a balance sheet that is linked together with the Government’s and NTMA’s accounts.

It continues to amaze me that citizens (everywhere – and not just Ireland) are expected to hand over tax and accept changes in expenditure levels without sight of a rudimentary set of accounts. I am sure that our covered banks – even at the height of their collective lunacy – required some sight of such a set of pro forma accounts before shovelling the money out.

Is it me? Does anyone else not see the requirement?

@Paul Hunt
“an outline of the State’s balance sheet and an indication of pro forma income and funds flow statements that are broadly compatible.”

A balance sheet for the state would be very interesting. I gather that New Zealand does produce such a document, perhaps following the Douglas Reforms of about 25 years ago or so.

This kind of measure could be done immediately, as part of overall improvement of managing public finances

As such a balance would presumably show items like liabilities for state funded pensions, I think it will be some time before our governing class provides such a means of comparing what we, citizens, own with what we owe, including contingent liabilities held in SPVs.

“Finally, he has a very illuminating chart of unit labour costs based on OECD data. Although the chart is small, the trend for Ireland is clear and unmistakeable. Ireland has already experienced a sharp reduction in unit labour costs relative to Greece, Italy and Spain. Of course, Germany is an outlier, with unit labour costs way below that group. But, although it isn’t stated by Martin Wolf, that’s based on the much stronger growth of German investment.

I think this might be under-stating the position regarding unit labour costs.

Although it doesn’t say explicitly, it looks from the chart of unit labour costs that it only goes up to mid 2009. But, as Alan Ahearne said in Galway a few nights ago (reported in another thread), the fall in relative unit labour costs in Ireland accelerated in late 2009. They fell by 3% in Ireland, but rose by 2% in the rest of the EU, in the second half of 2009 (according to AA). If that chart was brought up to date to early 2010, it would show Ireland about halfway between Germany and the other countries, rather than being just below the other countries. If present trends continue right through 2010, which is probable but not certain, Ireland could well go below Germany in the chart of unit labour costs by end 2010.

@ JohnTheOptimist

Germnay’s figures were distorted by having 1m workers on its subsidised short-term working scheme. That effect on productivity will be temporary.

The latest data from the OECD also shows the impact of the recession on Finland’s data.

Ireland was helped by the big output in the pharma sector without any significant increase in payroll.

http://www.oecd.org/dataoecd/40/36/44061973.pdf

So making judgements on current data is not wise.

@JTO, Michael

I tend to agree with Michael. A sharp reduction in exports in countries with a comparative advantage in capital investment goods (e.g. Finland and Germany) dominates their figures. If this trade doesn’t come back, then this shift is permanent, though presumably this is just more cyclical than other goods, and will enjoy a greater upswing in deue course, when German & Finnish unti labour costs will fall. However I don’t think you can just ‘remove pharma’. Remove any coutries best sector and of course they will all look worse.

I think the simpler to understand & interpret figure is just HICP. This shows that Ireland is making a big-adjustment, though outside Ireland and Portugal, the country making the greatest strides towards the famous “internal devaluation” is in fact Germany, exaclty the country which doesn’t need one.

@Ronnie
“the country making the greatest strides towards the famous “internal devaluation” is in fact Germany, exaclty the country which doesn’t need one.”
Perhaps not when compared with the rest of Europe, but I doubt that is what they are looking at…

“Perhaps not when compared with the rest of Europe, but I doubt that is what they are looking at…”

Germany is the world’s biggest exporter (possibly recently overtaken by China). Like China, it seems to want to maintain or even increase this position, but this is not desirable from a “global imbalances” point of view. From that point of view Germany needs to be a little bit less responsible, prudent etc. and loosen its consumers’ purse strings a bit.

@Ronnie O’Toole, Michael Hennigan

While I would certainly agree with Michael that the increase in output in the pharmaceutical sector in Ireland in recent years has been greater than that for Irish manufacturing industry as a whole, is the same really true for productivity and unit labour costs?

We need to take into account the fact that employment has been falling in Irish manufacturing industry as a whole (as indeed it has been in almost every country), but has been rising in the pharmaceutical sector. This will affect the respective productivity figures.

And while I could find no figures for earnings by sectors, I’d be surprised if earnings in the pharmaceutical sector haven’t been increasing by more than in Irish manufacturing industry as a whole. This will affect the respective unit labour costs figures.

I have just done some very quick calculations using figures obtained from a very quick browse of the CSO website. So, a health warning is attached. While they are very crude, they seem to indicate that productivity in Irish manufacturing as a whole has actually been increasing more than in the pharmaceutical sector. And, if so, it is very likely that unit labour costs have been increasing less in Irish manufacturing as a whole than in the pharmaceutical sector. I must say that I was surprised by these results. But, assuming that I haven’t made a botch of my very quick and crude calculations, this is what they seem to show. This is what I got:

Irish manufacturing industry as a whole:

change in output between 2000 and 2008: +43%
change in employment between 2000 and 2008: -17%
change in productivity between 2000 and 2008: +72%

pharmaceutical sector in Ireland:

change in output between 2000 and 2008: +62%
change in employment between 2000 and 2008: +5%
change in productivity between 2000 and 2008: +54%

The figures for full year 2009 aren’t out yet. But, while output in the pharmaceutical sector has performed much better than for manufacturing as a whole in 2009, the above productivity figures may not change that much because of a much larger fall in employment in manufacturing as a whole than in the pharmaceutical sector.

So, going back to the original thread, which was about unit labour costs, I don’t think there is any evidence that these (or the productivity figures) are worsened at all by the exclusion of the pharmaceutical sector (even if the output figures are).

@Michael Hennigan — do you have a reference for a regular data source on the numbers of workers on the German subsidised short-term working scheme?

http://www.wsws.org/articles/2010/jan2010/loca-j21.shtml

Socialists! But maybe they can tell the truth? Germany is not so well off, with local authorities, having structural revenue problems, suggesting obliteration by 2015 for one???
“Gee, honey things are bad all over!” “As heroin is withdrawn the addict goes through de Nile etc”

A false economy, based on bizarrely low interest rates, and hyper inflated credit, is now being revealed. What are the real values of labour, assets and LIABILITIES after this binge created by unrestrained, over encouraged, fractional reserve banking.

Oh yes, the liabilities owed to this banking masheein, are scrosanct. Else we can’t borrow again! Yes, need that heroin! Look at all the money the gang made the first time!

This isn’t theft, it is just business, suckers!

@JTO,

Apologies, I think you misunderstood me. My comment on pharma wasn’t aimed at you, but at Michael. My point was that you can’t just remove the sector with the lartgest produvtivity growth (presuming in fact it is pharama as I have always assumed!) in Ireland, and not do it for other countries.

My point aimed at you John was that unit labour costs will be dominated in in the shortrun by movements in output which might be experiencing very strong cylcical trends, so do not reflect the long run competitiveness of a country. A more stable proxy for competitiveness may be HICP, which is certainly simpler. By this measure we are gaining competitiveness on overybody, though oddly Greece more than any other country. My point was that Ireland (and to a lesser extent Portugal) is the exception, not the rule, and that repricing vis-a-vis Germany is not happening elsewhere.

As for your productivity assessment, Forfas agrees with your quick calc! The ever useful ABSEI was released the otehr day (www.forfas.ie), which on D14 contains the Total Value Added per Employee. It shows that the in p% terms, growth in val add per employee from 2000-2008 was 3.4% in “Chemicals”, compared to 6% in manufacturing and 9% in services. HOwever as with all Irish trade numbers this has to be treated with caution, as the val add per employee is €622k in chemicals, so clearly MNC pricing is obviously skewing whats really happening.

Which brings me back to the moral of the story, just stick with HICP…..

@Ronnie,

I too am a fan of the HICP – primarily because, at the end of the end of the day (and with the exception of exports), consumers pay for everything and an EU-wide standardised measure of consumer prices is a key measure of the extent to which the single market is working (or not). But my focus is less on movements in price levels (which I accept are important and, at the moment, are heading in the right direction), but more on relative price levels. In my view Ireland is still too expensive relative to other EU-members and not enough is being done to squeeze this gap which arises primarily from inefficiencies in the State and semi-state sectors and from monopoly profits in the private sheltered sectors.

@Paul,

Certainly Ireland remains relatively expensive. I also agree that productivity in the non-tradable sector needs a lot more focus, with public transport, law, payments system, water provision my top picks.

@Ronnie,

No disagreement from this quarter. Nor do I disagree with your top picks, but, as you might expect, I have a few more candidates. But we’ve been here before. I believe tackling this price gap should be near the top of the list of economic policy priorities, but it needs objective and disinterested analysis to quantify the impact and causation and to devise appropriate remedies.

There seems to be an unholy alliance between the unions in the state and semi-state sectors and the private sheltered sectors to prevent any movement on this. One only needs to look at the composition of the Dail and the functioning of “social partnership” to the end of last year.

But it is surprising that the academics on this site have not risen to the challenge.

RE Unit Labour Costs

The unit labour costs in the article are trends since 2000, not levels.

With regard to how expensive labour is in a country I consider real labour costs to be more useful than nominal. I did some calculations myself and found that Germany had higher nominal unit labour costs than Greece, Italy, and Spain in 2008. Spain had higher real labour costs. Ireland has high nominal unit costs, but low real labour costs.

The reason for the disparity in Ireland is that other costs (rent, electricity, insurance etc) are so high, pushing up the overall price level. This suggests to me that in order to regain competitiveness there is more scope for non-wage cost reductions than wage reductions.

It should also be remembered that these unit costs are for the entire economy. I think a cross country comparison of nominal unit costs is really only relevant if we calculate it for the export sector. (I would calculate this myself, but I do not know of any relative price index for the export sector that would be necessary for the calculation).

@ TC

The publicly subsidised stimulus measure supported 1.056m workers in September, compared with 1.516m in May, when demand for it peaked, according to Bundesanstalt für Arbeit, the federal labour office.

Deutsche Bank Research said last month that Since the onset of the crisis, labour productivity has declined by 6% in Germany. There was initially a synchronous decline in the United States and the United Kingdom which continued up to Q1 2009. But then companies in these countries started to severely reduce their headcount, with productivity rebounding as a result.

http://www.finfacts.ie/irishfinancenews/article_1018607.shtml

@Michael (and others!)
Does this show productivity to be as bogus a statistic as GDP? Or bank profits? (Factoring in accounting wheezes like the positive gain from the reduction in the value of outstanding debt).

What would be good measures?
Perhaps income tax ‘potential’?
Full-time employment level?
Contributing income tax payers? (i.e. those not in receipt of a state subsidy).
And the good ole GSP criteria – for prudent government, adjusted, of course, for structural problems…

I notice in the US that the headline unemployment percentage doesn’t count those on emergency benefits… and that productivity only relates to what private companies do, not to what the economy as a whole does…

Rory O’Farrell

You are correct. The chart shows trends, not levels, in unit labour costs. They would therefore need to be supplemented with tabulated ULC levels in order to begin to quantify this aspect of competitiveness. The FT actually OECD) chart simply establishes that Ireland has not expereienced any deterioration on this measure vesu a group of EU economies, and that it has already experienced a recent improvement.

Price inelasticity also seems to be a factor regarding certain Irish export sectors, highlighting the exisitence of a host of factors unrelated to price.

Yoganmahew

The debt levels are correct. I believe Martin Wolf was attempting to show what they were before the effects of the recession. Of course Ireland’s position has deteriorated since then, but so has everyone else’s. Net debt levels are frequently used in order to prvide comparisons of relative ‘headroom’ for borowing. Gross debt levels are higher, but these are boosted by Irish prefunding of liabilities.

@Rory O’Farrell,

I agree with your contention “that in order to regain competitiveness there is more scope for non-wage cost reductions than wage reductions”, but disagree with “a cross country comparison of nominal unit costs is really only relevant if we calculate it for the export sector.” Obviously we should be concerned about the competitiveness of firms in the existing export sector, but I would be more concerned about the high costs restricting the expansion of existing firms in the export sector, preventing firms in the domestic traded sector expanding into exports, deterring new mandates here from MNCs or simply deterring the establishment of Irish firms focused on the export market.

Yes, exporting firms consume a “basket of goods” that is different from that consumed by households, but a number of the costs are common and high costs generally will, quite justifiably, push up nominal wage demands and price some workers out of the market.

Garret Fitzgerald is the first high profile commentator (http://www.irishtimes.com/newspaper/opinion/2010/0123/1224262925732.html) who has focused on this problem. But nobody is doing any serious analysis of these excessive costs, their impacts, causes or the remedies required.

I wonder why. A cynic might sniff a collusion of vested interests.

Comments are closed.