Stephen Says...

Stephen Says...

This is my blog

sharing occasional thoughts about things that interest me

Double or Quit? Dealing with Greece

the state of the countryPosted by Stephen Tue, July 07, 2015 12:14:26

It’s frustrating that the Eurozone can’t seem to get their act together and to use their collective economic strength to deal with the difficulties currently being faced by quite a small component country of the zone (i.e. Greece). In order to check out whether my intuitive feelings were massively wide of the mark I decided to look for myself at the figures that would illustrate the dimensions of the problem and to consider the potential for political action to address it.

I think it’s pragmatic to surmise that establishing the euro as a sovereign currency reflects a nascent common sovereignty for the countries of the zone in which it operates. On this basis it’s appropriate to consider the para-statal financial circumstances of the Eurozone as a context for dealing with ‘the Greek crisis’. The compilation of statistics presented in Table 1 makes a start.

The figures in the table represent the situation across the 18 countries of the Eurozone in 2014 (Lithuania joined at the start of 2015). The first thing to notice is the dominant position that devolves upon the four largest countries: Germany, France, Italy and Spain (the Big4). Together the Big4 account for over three-quarters of population and GDP as well as state revenues and government debt across the zone as a whole. And the idea that the Big4 effectively represent a core or centre-of-gravity for the zone is reflected by the fact that their aggregate statistics for activity rate (Emp/Pop), economic significance of the state (GRev/GDP), weight of government debt (GGD/GRev) and average income (GDP/hd) are all very close to the figures for the Eurozone as a whole.

The size of the state relative to the economy as a whole varies quite widely across the Eurozone. Overall within the zone government revenues equate to 46.7% of the total GDP. But in some countries the share is less than 40% (Ireland, Latvia and Spain are the lowest) whilst in others it is more than half (Finland, France and Belgium are the highest). Luxemburg, Ireland and Austria have the highest GDP/hd; Latvia, Slovakia and Estonia have the lowest; the variation is extremely wide. Given the current focus on Greece, it is interesting to see that the activity rate (the fraction of the population in employment) is lowest there (32.2%) whilst the burden of government debt in relation to the size of government revenue is highest there (406.4%).

Since ‘the Greek crisis’ has concentrated so heavily on government debt it is worth noting that across the Eurozone as a whole such debt is equivalent to about double the annual revenue of the state sector (201.3%). Aggregate statistics for the countries with a state debt more than 250% of government revenue (Cyprus, Greece, Ireland, Italy, Portugal and Spain) indicate lower-than-average activity rates and GDP/hd, as well as a relatively smaller-scale government revenue stream. It’s notable that 2 of the Big4 countries, Italy and Spain, are members of this group.

Turning to an explicit treatment of the Eurozone as a sovereign area with component country-regions, some proportional figures are presented in Table 2.

Although all the recent fuss has focused on Greece, it’s a small part or minor region of the overall Eurozone economy. It is interesting to observe how closely the various countries’ shares in total Eurozone government debt mimic their shares in the total population of the zone. Greece, for example, is 3.3% of the Eurozone population and accounts for 3.4% of total Eurozone government debt. Germany has 24.4% of the population and 22.4% of the debt. France has 19.2% of the populace and 21.5% of the debt. Spain has 14% of the people but only 10.9% of the debt. The countries (regions) whose shares in the debt are significantly higher than their share in the population are Ireland, Belgium and Italy. The virtuous, frugal countries (regions), whose shares in the debt are significantly lower than their share in the population, are Estonia, Latvia and Slovakia.

Maybe it’s time for the Eurozone to redouble its efforts to achieve integration and to assume common responsibility for all the government debt across the countries (regions) of the zone. Because the most heavily indebted countries (CGIIPS) are dominated by two of the Big4 (Italy and Spain) it should be possible for these two to broker any such deal, from which the solution to ‘the Greek crisis’ would emerge as a relatively minor by-product. Doubtless common fiscal rules and procedures required as part of such a deal would take a long time to harmonise (with plenty of scope for transfer of good practice across member states) but since this might effectively amount to much the same in time-scale terms as debt rescheduling, and since it might much more readily be presented as (if not actually constituting) progressive development rather than palliative care, this ought not to detract from the substantial achievement that such an agreement would create. The opportunity for established governments in Italy and Spain to demonstrate constructive leadership to their own electorates at a time when they are under pressure from radical alternative challengers ought to encourage this sort of initiative. But I’m not holding my breath.