|Title:||Europe real wages growth in percentages including mean and standard deviation for 2010|
|Source:||Indian Journal of Economics and Business|
Start of full article - but without data
Real Wages Growth
AUSTRIA X.X BELGIUM X.X FINLAND X.X FRANCE X.X GERMANY -X.X GREECE X.X IRELAND X.X ITALY -X.X LUXEMBOURG -X.X NETHERLANDS -X.X PORTUGAL -X SPAIN -X.X Mean X.XX Standard Dev. X.XXXXXXXXX
The stability of the EURO depends on the stability of its member countries. Regional currencies will produce winners and losers if countries have different macroeconomic needs. These countries that have different needs are friends as well as rivals. The reason being is that members have interests to harmonize effectively with other members, however they still desire optimization their sovereign economy. A country with national interests that conflict with the policies of a regional currency will result in major inefficiencies and increasing costs. As the global economy enlarges, countries will require more autonomy in order to become competitive globally rather than regionally. This paper will look at optimum currency area theory, and apply it to the current situation of the EURO. In its details it will explain the problems of the regional currency as well as its failure to pursue models that maximize efficiency and reciprocation.
Based John Nash's game theory model of second best, the EURO (X) is an excellent scheme. These fundamentally liberal economies cannot find desirable trade conditions vis-a-vis the World Trade Organization, so they resort to the next best thing, each other. These economies that bind themselves together will integrate labor, capital, and trade interests. A common currency places the region in a favorable position to ensure trade with each other. However, as this region receives increasing pressure to compete with the burgeoning global economy, the theory of second best ceases to function. Each country has a sovereign interest, and as a result, countries that benefit more from the global system will conflict with countries that only receive moderate gains from the regional system. As a result, countries that are not remaining competitive under the common exchange rate will become adversarial with the region. Whichever country has more bearing on the currency will maintain more control of monetary and fiscal policy. Countries that have little bearing on the currency will ultimately have no autonomy to shape favorable policy. Therefore, countries that are already economically delicate will be the most vulnerable to regional shocks as well as less likely to recover from them.
The EURO is designed to harmonize the region by increasing the desire for economic reciprocity. Since the region will rise and fall together, the EURO gives reason for this reciprocity. However, the EURO monetary system takes away the autonomy of states to mend their macroeconomic problems. If there are different problems occurring in two different states, stabilization will harm one of those countries. For example, if inflation affects one country more than others, there will be a demand to increase interest rates. If there is another country in a debt crisis, that country will demand a decrease in interest rates. The system will favor to remedy country that has the largest effect on the currency. In addition, it will favor the intervention policy that has the weakest effect on the currency. Thus, any countries that are imbalanced relative to the region can expect further weakened internal conditions.
The example previously mentioned is prominent in the EURO system. This is occurring with four countries, Portugal, Italy, Ireland, Greece and Spain (PIIGS). On the other hand, the region as a whole is experiencing a fiscal crisis which dictates inflation is imminent. The EURO is now facing a financial crisis as well as a fiscal crisis. According to macroeconomic theory, a economy cannot fix one crisis without exacerbating the other. An established resolution for a debt crisis, is to expand money supply and lower domestic interest rates. However, in order to solve the balance of payments crisis the European Union (EU) must defend its exchange rate, tighten money supply, and increase interest rates. These two solutions cannot happen simultaneouslyX thus the monetary regime is forced to punish countries facing one of these crises.
Recent activity in the EU has illustrated that it is willing to harm its most vulnerable members as it has raised interest rates. The stringent monetary policy cannot justify deprecating its currency in favor of a few nations. Instead it needs to protect capital inflows as well as its largest economies in order to hedge risk from the smaller ones. PIIGS have already been struggling with old interest rates, which indicate that efficiency is not a product endemic to a regional currency. The EU is currently proving that it has become too large to induce reciprocity and harmonization for all of its members.
II. RELEVANT MODELS
The theory of optimum currency area (OCA) claims, if countries can sustain fiscal balance while sharing labor, a common currency is beneficial within a region. The OCA is thus a region that maximizes it overall efficiency by uniting under a single currency. Robert Mundell is credited with OCA [X] and thus the idea that sparked the EURO. Mundell explains, countries that are undergoing increasing economic integration constitute an experiment such as the OCA. The basic premise can be illustrated using two countries, A&B (See Figure X). For example, Country A imports fans, Country B imports furs, and the upcoming year is expecting a prolonged winter. As consumers buy more furs and less fans, the unemployment rate in Country A rises and current account deficit increases. However, Country B has increased labor demand as well as a current account surplus. Assume these countries had free labor mobility and shared a common currency. The excess labor from Country A could move freely into Country B and the accounts would balance each other. If a region has a labor market that is amalgamated and can maintain external balances, then these countries have met conditions for OCA.
[FIGURE X OMITTED]
Mundell's model briefly explains labor mobility is a factor of geographic characteristics. McKinnon (1963) [X] developed an idea that labor mobility can only be achieved if there is comparative factor mobility. In other words, a labor solution would require similarities in labor and capital markets. Labor mobility will be more imperfect if countries differ in factor abundance. For example, assume Country A can achieve full employment by producing only capital intensive goods, and Country B can achieve full employment by producing only labor intensive goods. Country A is capital abundant and Country B is labor abundant. The mobility of these two countries will be too different in order to assure each other's needs for more capital or more labor. Therefore, if these countries specialize in goods that do not have similar factor intensities, then labor migration may not satisfy the requisites for balance.
The macroeconomic conditions of the OCA must also be similar in order to ensure a common exchange rate is mutually beneficial. In particular countries should share macroeconomic conditions that allow for similar requirements in the adjustment of interest rates. More precisely, if the region's macroeconomic elements are divergent, then a common currency can exacerbate certain country conditions. This has been made clear from the recent events in the EU. The OCA model asserts that stabilization would be difficult to preserve for the same reasons the PIIGS are in debt crisis and the EU is experiencing inflation crisis. Although these states need low interest rates to relieve burdens, the EU has increased its interest rates from X% to X.XX% in order to obstruct further inflation [X]. The OCA will make changes based on the economy as a whole, rather than fine tune to the needs of an individual actor. Therefore, if an individual actor requires stabilization policies that conflict with the economy as a whole, that actor will not be particularly successful in the OCA.
The conclusion of the theory is that OCA increases overall efficiency among similar states within a region. The larger an OCA can become the better the outcome will be. However, if there are differences among states the OCA will produce winners and losers. Winners will largely benefit from the OCA and stabilization policies, and losers will be forced finance deficits which are exacerbated by region's stabilization policies. If labor and capital are immobile, countries should have separate currencies. This will cause varying rates of unemployment and inflation [X]. Therefore, a practical OCA will tend to be small in order to secure efficiency throughout the region.
Mundell claims, there are seven criteria an OCA should meet in order to be successful:
(X) International pricing system.
(X) Export and import sectors that will commonly fluctuate with the regional currency.
(X) Risk sharing system to redistribute capital in distressed markets.
(X) Central banks do not illustrate favoritism in markets or countries.
(X) Monetary disciple.
(X) Similar capital mobility and labor mobility.
(X) Wage and profits remain flexible within the exchange.
A similar system is used to integrate countries into the EURO. This is called the Maastricht treaty [X]. In order to meet this criteria, a country must not exceed an inflation rate X.X points higher than the top three EU countries, maintain a government debt ratio less than XX% GDP, a maximum long term interest rate of X%, and a country cannot devalue its currency in over three years.
This criteria fails to observe some conventional extensions of Mundell's model that indicate harmonization. Kenen (1969) [X] indicates that there must be common business cycles within an OCA, so that shocks are not unevenly distributed. The reason for this, is that countries that share common shocks will have similar monetary and fiscal needs whenever policy is forced to change. If a country has dissimilar business cycles, the region's monetary situation will favor its superior components. As a result, the exchange can move in the opposite direction required by the outlier country's business cycle. Therefore, the benefits outweigh the cost to maintain monetary independence if dissimilar shocks can be observed.
Kenen impies, that a country with diversified exports would be better off to generate income in the OCA. A country without diversification will be prone to dissimilar shocks in an OCA. Diversification hedges the risk of sector shocks, which will synchronize better with regional trade of the OCA. If a country has limited export diversification it would be better off with a sovereign exchange. This would allow the country to better control its currency during shocks and induce a J-curve hypothesis type growth vis-a-vis devaluation.
The Maastricht Treaty seems to ignore this microeconomic extension to the theory, and adopts a much narrower range of quantitative measures. Perhaps the ECB assumes that if a country can match inflation without devaluation, it is on similar business cycles. Or perhaps they feel that it is a satisfactory measure because business cycles will become synchronized subsequent to OCA formation. Frankel and Rose (1998) [X] believe that business cycles are not particularly important, because trade integration will gradually coordinate these cycles over time. The mechanism of export/import acts reduce any ramifications from shocks. As an OCA leads to maximum trade efficiency, business cycles will become synchronized. Therefore, since business cycle relationships are endogenous to regional integration, countries in an OCA will not need to worry about this.
The Maastricht Treaty most likely considers this position since it has no clear criteria for business cycles. The issue with this idea is that regional integration does not ensure a country has hedged risks with diversification. Although countries in the OCA did synchronize business cycles, some countries will still be more vulnerable to shocks. Given that the OCA will only react to region wide shocks, an increased shock to one country could exacerbate macroeconomic conditions in that country. Therefore, countries that are more sensitive to changes in price or wages are potentially better off with individual monetary control.
The Maastricht Treaty does look at inflation, however it fails to look at consequences of industry shocks. Instead of simply measuring inflation over a period of two years an OCA should measure inflation comparatively in certain stress conditions. An increase in oil prices could highly affect one countries comparative advantage more than others. If a shock injures a country much more than the region, the monetary system will further punish that country. In order to ensure success in an OCA, the region must be more selective. An OCA would be doing itself and its member states a large service by waiting for a regional shock to measure comparative inflation. The empirical section will look at inflation of member states to illustrate how well they do alter becoming members.
Stephen Silvia (2004) [X] looks at the lack of integration since the formation of the EURO. The author explains that the EURO falls short of an OCA due to asymmetrical shocks. The author explains that subsidies and other non-tariff barriers still exist within borders which adds to the rigidity of labor immobility. Asymmetrical shocks influence wages and the macroeconomic conditions differently among members of the OCA. As wages increase in some countries they lose regional and global competitiveness. It is worth pointing out that the author illustrated that Germany was experiencing deflation while Spain and Ireland were experiencing inflation at the time it was written. This demonstrates that before the 2008 global shock occurred, there was still asymmetrical regional shocks with some of the PIIGS. The 2008 crisis simply augmented the position that the EURO is a Sub-Optimal Currency Area (SOCA).
Maloney and Macmillen (1999) [X] share many other's pessimism concerning the functionality of a large OCA. The authors contest that maintaining some sovereign control of currency is vital for the welfare of a country. As an OCA becomes larger, each country in the OCA forgoes more benefits of the region. The authors explain that a small currency area still allows some autonomy of a nation and increases reciprocity. As an area begins with two countries, those countries have XX% control in monetary policy. If it gains four members they will have XX% control, and XX.X% as grows to eight countries. As an OCA grows larger, the cost to sovereignty and national interest increases. The authors explain that over expansion is a function of marginal costs and benefits. When a currency area continuously expands it will increase its likelihood to induce misalignment. It is best for the currency area be at a point where marginal costs and benefits are equal to zero. Expansion beyond this point would result in increased marginal costs and decreased marginal benefits. If the OCA and countries that wanted to join it were rational actors they would not expand past this point. However, since OCA membership has political components, the OCA may forgo economic benefits for political benefits. For the reason that European States have historically been fearful of each other, the prospects of a union bestows an agreement towards regional peace. In addition to security, member states feel they have an economic safety net by the other states and the central bank. It is understandable that the EURO may have overextended its OCA in order to achieve broader goals.
This study will monitor the first twelve countries of the EU, in order to see if the union initially over extended its OCA. A particularly large focus will be placed on Germany and Greece as most different countries. For the purpose of using OCA in the EU, this paper will only utilize indicators that can be used on a country that is already integrated. These factors are X, X, and X or more specifically, imports, exports, labor mobility, wages, and profits. Furthermore, with the extensions provided in the theoretical section, it is relevant to include debt ratios and factors of production. For the reason that countries in the EU are already part of an OCA, the balance of payments will always be balanced. Account balances are thus redundant to analyze since the data is already integrated into a much larger system. Therefore, the indicators this paper will look at empirically are: (X) Exports of goods over imports of goods, in order to provide a simple comparison of trade economies. (X) Factor outputs, in order to demonstrate if a countries labor is reciprocal with theregion on average. Unemployment rate will also be used. (X) Real wages relative to euro area will be illustrated by a study conducted at the European Central Bank (ECB) and assumed constant. (X) Profit will be simply measured the change in real GDP growth as a percent. (X) And finally, this study will look debt percent GDP. Additionally, time series data will be looked at between Greece and Germany to illustrate how different economies may become in the OCA.
III. DATA AND METHODOLOGY
The EU has been expanding since its creation and is still looking for new members. If imbalances occur, then expansion only makes it harder for countries to recover from these imbalances. Countries that are labor abundant would require an entirely different exchange rate than the capital abundant countries. A country like Greece would benefit from devaluation in currency since most of its exports are related to textiles and agriculture. However, since it is part of a largely capital abundant region the exchange rates will not favor its exports. Greece then must finance deficits with escalated debt. Greece and other countries similar to it will establish a need for policy that other countries are unwilling to undertake. Rather than creating a balance, expansion of the OCA will most likely create sub-regions with conflicting monetary and fiscal needs. The OCA's primary functions of balance and efficiency has been defeated if these conflicts are present. The OCA will have then proven that it has over extended its optimum size. The data presented in this research will illustrate differences in the OCA that obstruct efficiency and create imbalance.
According to the theoretical section, a common exchange ought work to improve members' trade balance in an OCA. Country exports over imports (X/M) is used as a variable in order to illustrate EU countries trade balance in Figure two. In this model a factor below one is a trade deficit and a factor above one is a surplus. This model indicates which countries in the EU are able to maintain competitive in the global market.
This model is vital due to the current situation of the PIIGS. A country in debt crisis will have trouble maintaining confidence in their financial sector. In order to abate double deficits domestically, it must maintain a trade surplus. At first glance Ireland's giant surplus seems to indicate it is in good shape. However, recent developments have established that U.S. companies are using Irish subsidiaries as a tax haven [XX]. Most of the value of Irish productivity will then accrue in the U.S. The true balance is thus unknown and hard to speculate on. Nonetheless, Ireland represents where the PIIGS need to be competitively.
[FIGURE X OMITTED]
As illustrated in Figure two, Greece is running a comparatively large trade deficit. This country would most likely benefit if the EURO depreciated. However, since Greece is attached to the EURO, its export sector will suffer and debt can be expected to increase.
Figure X indicates what countries have failed to benefit from labor mobility. Labor demand has decreased in a domestic economy, yet there is not an increase in demand from the region. This will result excess labor with nowhere to go and high unemployment in the domestic country. If Greece cannot increase exports by currency devaluation, its labor must find somewhere else to go.
Unemployment has seemed to have harmed countries with relatively higher labor abundant the most. Spain is an exception with a good capital abundance. This could be due to a quick shift of labor intensive productivity to capital intensive. Since 2008, the construction bubble in Spain has burst. The excess labor this has produced has failed to migrate. All the PIIGS are double digit unemployment except Italy. Italy has a high capital abundance relative to the PIIGS. High unemployment rates should not happen in an OCA, which means labor distribution among members is not efficient means for balance.
Another indication of labor mobility/immobility is wage rates. In figure X, Greece and Ireland display the highest wage increases relative to the EURO area. Not only is there high unemployment but there is also reduced incentives for migrating.
This does not explain however why Spain's labor has been immobile. This country has the highest unemployment rate and saw a decrease in wages. The incentive for migration is established; however it is not taking place in this country. Spain has exhibited that labor mobility is not flexible enough to be a major balancing feature of the OCA.