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Home Publications Blogs Beat the Press The European Central Bank: Good Paying Jobs for People Without Skills?

The European Central Bank: Good Paying Jobs for People Without Skills?

Friday, 03 May 2013 04:54

Robert Samuelson actually has a useful column today pointing out the imbalances that underlie the problems in the euro zone. The basic point is that the bubbles of the last decade led to a situation where prices in the crisis countries are hugely out of line with prices in the core countries, most importantly Germany. This means either substantial deflation in the crisis countries, considerably more rapid inflation in Germany and other core countries, or someone leaves the euro.

Samuelson rightly notes that none of these solutions seem likely right now for either economic or political reasons, or both. This means that the crisis is likely to persist for some time into the future.

However there is another part of the story that really deserves mentioning. What on earth were the folks at the European Central Bank (ECB) thinking in the years leading up to the crisis? The misalignment of prices in these countries did not arise overnight. There was considerably more rapid inflation in the current group of crisis countries in the last decade leading to enormous trade imbalances. Here's the data from the IMF showing the deficits as a share of GDP.

Current Account Balance as a Percent of GDP

Greece -6.533 -5.785 -7.637 -11.388 -14.609 -14.922
Portugal -6.433 -8.327 -10.323 -10.685 -10.102 -12.638
Spain -3.508 -5.248 -7.353 -8.961 -9.995 -9.623

Source: International Monetary Fund.

These are incredible imbalances. In 2005, when the top people at the ECB went to the annual Fed meeting at Jackson Hole to celebrate the "Great Moderation" and debate whether Alan Greenspan was the greatest central banker of all time, the current account deficits in both Spain and Greece were already more than 7 percent of GDP. This would be a deficit of more than $1.1 trillion in the current U.S. economy. The deficit of 10.3 percent of GDP in Portugal would be almost $1.7 trillion in today's economy. These deficits continued to expand, with Greece's peaking at almost 15 percent of GDP ($2.4 trillion in the U.S. economy) in 2008.

How did the ECB think these imbalances made sense? There was some room for these countries to catch up relative to the core countries, but none of them was a China or India that could plausibly envision double-digit or near double-digit growth for decades. It's hard to envision what story these people could have told themselves that did not have "disaster" in it. But, they did nothing and these economies collapsed.

The people in the crisis countries are now suffering enormously with no end in sight; and the boys and girls at the ECB? They still have their high paying jobs and plush pensions. See, the modern economy does offer good-paying jobs for people without skills.

Comments (14)Add Comment
written by JSeydl, May 03, 2013 6:13
I would also add all of the Wall Street economists into this category. Nearly all of them were oblivious to the housing bubble that wrecked the economy, and they're still getting paid way more than anyone at the ECB. The tipping point for me was when these assholes turned against construction workers, arguing that they don't have the skills to compete and that's why they're unemployed. I'm sorry, who doesn't have the skills to compete? You hotshots have gotten everything wrong over the past decade.

Somebody should write a paper and call it: "Structural Employment: The Financial Rewards of Incompetence."
CAD Deficits Need Offsetting Budget Deficits
written by Matt McOsker, May 03, 2013 7:34
When you run a trade deficit, the private sector needs offsetting budget deficits to keep the private sector in balance and prevent a loss of net private savings. So a -5% of GDP CAD needs a -5% of GDP budget deficit. If you want to increase private savings, then your budget deficit as a % of GDP must exceed your CAD % of GDP.

This is the same story in the U.S. in 2007-2008. We had a CAD of around -6% of GDP each year and budget deficits of -1.86% and 1.15% respectively. That was not enough to support the private sector's credit structure.
written by watermelonpunch, May 03, 2013 7:49
Yep the latest richness is that they're now asking people who CAUSED the financial crisis for solutions on curing long-term unemployment.
My guess is that the best advice those guys can give is: Do a really really bad job, tank not only your own institution, but the entire economy - and you will be assured gainful employment & riches for life.
written by Jim, May 03, 2013 8:19
Dean, can you write a column about Mexico? The one you wrote about Thomas Friedman was helpful but there was a one in the WSJ claiming 7 percent GDP growth which seems like utter folly, especially after another scandal emerged. Thanks
Has not the economy of Germany looked artificially good in the recent past?
written by John Wright, May 03, 2013 9:05
If the current account deficits of Greece, Portugal and Spain were largely with Germany, then the German economic strength of 2003 to 2008 is overstated.

Did not Germany and France, in effect, loan money to the PIIGS to buy German and French output and Europe is now recognizing these countries were/are a bad credit risk?

It appears the recent USA and European economies can only approach full employment when bubbles are actively growing (USA had Internet, housing bubbles) Europe (selling to the PIIGS and housing bubbles).

Throw in climate change, which could depress output, to the mix, and I'm skeptical much will be done to resolve the employment situation in the USA or Europe.

written by Matt McOsker, May 03, 2013 10:56
John Wright, Germany has looked pretty good because they have been running large current account surpluses for some years. I don't think that means their economic strength is overstated, but it simply means that Germany has not needed to run large budget deficits, whereas Greece does need to. The fallacy that since Germany is ok without larger deficits, then Greece will be too ignores the balance of trade. The overall employment situation in Europe and the U.S. will only improve if larger budget deficits are implemented through higher government spending that increases private sector savings.
Can you explain more about the sudden price rises in Southern Europe?
written by J Highfill, May 03, 2013 12:04
As someone who has frequently worked and traveled in Spain over the past 20 years, I observed the rapid rise of prices there after the adoption of the Euro. I assumed, however, as did Spaniards, that now, with the Euro, they had to pay German prices for everything. Wasn't the 56% inflation that Samuelson reports a result of a leveling out of prices all over Europe, based on German standards. The problem in Spain was that wages and salaries tended to be much lower than in Germany. People made up the difference with the easy credit. Given the similarly high rates of inflation in Greece and Italy, I would assume the same situation there. Can you comment on this? (By the way, thank you for your postings; I read them everyday and learn a lot.)
More on Germany
written by John Wright, May 03, 2013 12:10
My suggestion is that Germany's past current account surpluses could be written down to account for the bad debt the German banks have with the PIIG countries that provided earlier current account surpluses.

If the banking sector of a country loans 1 billion Euros to another country who then purchases 1 billion worth of products from the loaning country, the merchandise trade surplus of the loaning country might appear better, but if the eventual 1 billion Euro bad loan write-off is pushed onto the German taxpayers, they might get the accurate impression (in my opinion) they consumed resources and produced 1 billion worth of products and effectively gave them away to the other country.

But the Germans had jobs for a while building the "free gifts" at some opportunity cost.

written by Union Member, May 03, 2013 7:27
John Wright,

Can't we drop the PIIGS acronym? Isn't its usage the old blame the victim of the crime trick? In fact, hasn't its enthusiastic embrace by the Media and other "experts" (see Seydl's technical term for economists) enabled the fraud and incentivised incompetance to go unchecked, unprosecuted?
written by Philip F., May 03, 2013 11:50
Germany has taken advantage of the formation of the euro, relatively strongly going into the introduction of the currency and seemingly taking full advantage of that heretofore and now:

What is the purpose for the suffering through this mess? There may be one, but I'm not sure it's relevant any longer to say that the euro adds to providing any common ground to preventing future tensions amongst European nations. The euro currency may actually be creating a new source of political tensions.
Boys and Girls at the ECB
written by John Parks, May 04, 2013 8:34
"high paying jobs and plush pensions. See, the modern economy does offer good-paying jobs for people without skills."

The modern economy that was not unique in this aspect. History offers hints that this might not have been uncommon.

Su Tang-p'o, a Chinese poet, almost a thousand years ago wrote:

"On the Birth of His Son"

Families, when a child is born

Want it to be intelligent.

I through intelligence,

having wrecked my whole life,

Only hope the baby will prove

Ignorant and stupid.

Then he will crown a tranquil life

By becoming a Cabinet Minister.
written by Philip F., May 04, 2013 9:20
My URL got zapped -- here it is: http://www.nytimes.com/2011/04....html?_r=0
Must Be that Meritocracy Everybody Tells Us So Much About
written by Hugh Sansom, May 04, 2013 12:10
The ECB brigade and their counterparts at the Fed or the Bank of England have all the right credentials! What more could you ask for? They make large sums of money. Many were already wealthy. As Andre Shleifer has told us, we need no more proof of their innate (genetic, biological) superiority. We the People therefore have a divine obligation to obey. Isn't all this perfectly, transparently obvious?
this is not news
written by pete, May 05, 2013 10:10
Krugman several years ago said that real wages in Greece were like 25% too high, and that they had to fall back to earth to get growth stimulated again. His simple argument was that Greeks were not as productive as Germans, but their wages had risen as if they were. Now those Greeks that are productive, like high tech workers, are headed to Germany, an instant brain drain. If only the U.S. could absorb some of these and doctors and nurses to get our health care costs down.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.