Spain, Italy and Greece are miracles waiting to happen
Last November, at the time of the Chancellor of the Exchequer’s Autumn Statement, the two men in charge of our fiscal and monetary policy together delivered the gloomiest peacetime message in our history. Those of us who have been pessimistic all along were totally outflanked.
The governor of the Bank of England was absolutely right to decry the sudden vogue for technocracy. As he says, the problems in Europe are not fundamentally about a shortage of liquidity, as many commentators suggest and as politicians are only too happy to agree. They are at root about solvency, about the ability and the willingness of countries like Greece to pay their debts, and as such they are political problems which require political solutions. It is simply wishful thinking to imagine that an economics PhD somehow provides access to the secret of how to balance the books of a society which has long been living beyond its means, as have the majority of euro zone members. If it is hard for a Government with a sound electoral mandate to deliver painful medicine, it is likely to be even harder for one with no mandate at all.
Far from being evidence of maturity, the way the political class in Greece and Italy has given way to technocrats is a total abdication of responsibility. What needs to be done to transform the prospects of Greece and Italy, Spain and Portugal involves no rocket science. No advanced macroeconomic theory is needed to get the basics right: to cut Government spending, introduce honest tax collection (especially in Greece and Italy), privatise and deregulate transport systems and utilities, and most importantly to allow labour markets to function properly so as to reduce unemployment to a minimum, rather than to maximise it, as they do at the moment.
If this prescription sounds familiar, so it should. Britain’s situation in 1979 was not unlike that of the ClubMed countries today, with the sole, critical difference that we had been able to print our own money – which we did aplenty in the 1970’s, generating inflation as high as 25 percent by the middle of that awful decade. In the end, the situation was salvaged not by an economist, but by Mrs Thatcher, armed with nothing better than the Micawberish economics of her father’s Grantham grocery.
By contrast, Italy had a professor of economics, Romano Prodi, as Prime Minister from 1996 to 1998 and again from 17 May 2006 to 8 May 2008, but he achieved very little in the way of reform.
Look at the first two columns in the table below, which give indicators of the scale of economic distortion: the Transparency Index, which focuses mainly on the extent of corruption, and the World Bank’s Ease of Doing Business Index, which attempts to measure the freedom of the corporate sector to fulfil its function of creating wealth and jobs. No West European country should ever be outside the top 30 on either index, and the rankings for Greece and Italy – behind many Third World countries (and not only in SE Asia) – ought to have shamed them and the E.U. into action a long time ago.
(out of 183 countries)
|Ease of Doing Business
|Central Government Debt
% of GDP
% of GDP
|Greece||80||100||20 %||148 %||9.0 %|
|Italy||69||87||9 %||109 %||3.6 %|
|Spain||31||44||23 %||52 %||6.2 %|
|UK||16||7||8 %||86 %||9.4 %|
|USA||24||4||8 %||61 %||10.0 %|
The first two columns explain the third. The harder it is to do business, the less of it there is, and hence the fewer jobs. Spain’s labour market regime makes hiring and firing so difficult that employers only take on temporary staff or avoid taking on workers altogether – hence the current 20 percent-plus unemployment rate (and the shameful 18 percent during the latter years of the boom). The situation in Italy and Greece is only a little better. In general, the Mediterranean countries need the supply-side revolution the UK and USA had thirty years ago.
The last two columns deal with each country’s fiscal imbalances, which are at near-catastrophic levels in all five, but especially Greece, Britain and the USA (though, since spending by regional governments is not included, the table probably presents too rosy a picture of Spain’s finances).
The take-away message from the table is as follows. All five countries have a fiscal mess to clear up, but the Southern Europeans have the advantage that there is an awful lot of low-hanging Mediterranean fruit to be picked by any genuinely reforming government willing to inflict the pain of removing the distortions from their labour markets and dismantling the barriers to entrepreneurship which riddle their economies. Spain in particular, but also Italy and even Greece are miracles waiting to happen – though of course it depends on the politicians whether we have to wait a few years for them to materialise, or a few centuries.
Image — A woman walks on a map of Europe, which is part of a marble world planisphere, in Lisbon August 14, 2011. REUTERS/Jose Manuel Ribeiro