The structural differences among countries in the Euro Zone

In the last months, there has been a discussion about the model of governance of the Euro. New voices have been listened talking about the possibility of an exit of the Euro as currency for some countries due to the Greek political crisis. I have shown in several articles that the Euro construction is an irreversible process. This does not imply that a country cannot abandon the common currency. It only implies that the cost for all countries would be much higher than the benefits it could have been provided yet.

A rupture of any integration scheme increases the probability of a collapse of the economies. Of course, the effect of an exit of an economy on the rest of the system can be different depending on the importance of the economy inside the common system. Greece never was seen as a system problem, however, other countries could have provoke a total disaster in the all the Euro economies.


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Graph 1 Contribution of the main Euro national economies to the GDP of the Euro Zone. Data Source OECD

We can see that Spanish economy is two times more contributing to the production of the Euro zone than Netherlands. Fortunately, Spain seems to be far from the creation of a systemic problem now that it has recovered a path of higher growth.

Euro zone is a complex scenario, because there are different policies involved in every country. The aim of the Euro is, in fact, to make easier and cheaper the international trade inside the zone. This is a way to reduce the increasing complexity that implies the creation of a common trade zone. I have analyzed this fact during several years from a complexity science viewpoint. Summarizing, the introduction of a common currency is removing a lot of structure substituting this energy in form of structure (several currencies) providing a state of maximum entropy or uncertainty (a single currency). This is not a problem although it can sound odd for some people. I have demonstrated before that a flat frequency characterization of an uncertainty distribution can be better than high frequency structure in order to control any system.

The problem of several currencies is not the number itself, but they are a source of high frequency structure when its value can change daily through trading, making the whole system less manageable by the political establishment.

The Euro is removing high frequency structure related to currency exchange; however, it does not make more uniform the productive differences among countries.

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Graph 2 Different production per capita in the Euro Zone. Data Source OECD

An indicator as the GDP per capita is showing than there are differences inside the Euro zone related to different social and productive models. There is some structure related to the productive models that is preserved inside the Euro zone and it cannot be removed easily thinking only in the use of financial tools.

An interesting way of look at this is analyzing some indicator of the added value of the labor factor, for instance, the GDP per hour worked.

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Graph 3 GDP per Hour Worked of the five main Euro economies. Data Source OECD

This graph is showing significantly than Italy has converged towards Spain instead of Germany or France in productivity. This indicator is not showing a bad behavior of the labor factor necessarily. It can be related to the added value of the activities made by the labor factor and then, the productive model. I will go back to this point later to show why this latter option is a better explanation of Spain.

The good behavior of the economy of Netherlands can be analyzed searching for another complexity-related indicator: the PMR. The product market regulation index, is showing barriers to entrepreneurship, trading, and so on.

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Graph 4 PMR index of the five main Euro economies. Data Source: OECD

Regulation is another way to structure the economy. In this case we can see as the effect of some degree of deregulation of the real economy can be positive. This is another clear example of how sometimes structure can be worse than uncertainty. It is well known than markets near perfect competition are more efficient than markets far from it. This indicator is showing why the promotion of competition drives to a better GPD per capita index in the case of Netherlands.

If regulation can be a barrier for growth, we should look at the taxes:

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Graph 5 Total Tax Revenue in the five main Euro economies. Data Source: OECD

We can see that countries with a lower taxation scheme have a higher productivity per capita. The case of Spain is very interesting to be analyzed. Spain has a taxation scheme similar to Germany but the added value of the labor factor is much lower. This is showing that the common economic policy actions as increasing or decreasing taxes cannot improve the economy themselves. It is necessary to act on the productive model. The required action of economic policy should be linked to an improvement of the productive model. For instance, reducing taxes to added value activities could be a way to promote a change of the productive model that a reduction of taxes itself will not provide necessarily.

Another interesting issue that can be seen in the previous graph is the effect of unemployment on the tax revenues. The great unemployment provoked by the crisis of 2007 in Spain has reduced the incomes from taxes by the Spanish government hugely. One of the main objectives of any government should be to make actions in order to preserve the level of employment of the people instead of thinking in taxation or public expenditure policies without an effect on the real economy.

Now, I am going to analyze the social responsibility policies of different European countries to show you that there are important differences.

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Graph 6 Green House Emissions per GDP of the five main Euro economies. Data Source: OECD

The more pollutant economies are those ones which productive model provides higher added value for the labor factor. This is related to industrialization. However, again, we can find a country showing a different behavior: France. This country has not got a lot of emissions of Green House effect gases due to its bet for the nuclear energy. Nuclear waste can be more dangerous, it has not an effect on the global warming of the planet.

If we want to analyze which ones are the less polluting citizens of this group of countries of the Euro Zone we should look at the following graph.

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Graph 7 Green House Emissions per Capita in the five main Euro economies. Data Source: OECD

As we can see, from a mean viewpoint, each German or Dutch citizen is a 50 % more polluting than each Spanish, Italian or French one although it is a 50 % more productive too. This is showing that the differences of productivity are more related to the productive model instead of the labor factor itself. This can be especially true in the case of Spain due to a bad support of the highest added value innovation activities for some governments. There have been important initiatives and reforms but a stronger effort is needed.

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Graph 8 Percentage of graduates with a role in introduction of innovation in the main Euro economies. Data source: OECD

In order to improve the productive model and innovation it is not only necessary to promote entrepreneurship. What it is necessary is to promote the entrepreneurship and the innovation activities of the higher education staff because it will provide higher added value businesses.

Spain and Italy has a similar level of GPD per hour worked, however, Spain has the lowest number of graduates with a role in the introduction of innovation and Italy the highest figure. On the other hand, Italy has higher tax revenue over GDP and Spain the lowest one. This is showing that economic policy is not a matter of two or three typical actions, as acting on taxes or expenditure.

Economic reforms must have the aim of improving the productive model of a country, and they have not any sense alone. Economic policy is a matter of many coordinated actions searching for a common objective.

Summarizing:

  • The integration process of Europe is highly complex. There are a lot of differences among countries, and then, there is a great need of economic policies driving to convergence.
  • Financial mechanisms are very positive, however, they cannot provide all the solutions required to reach the economic convergence.
  • Improvement of market regulation is a must in order to get better results and to preserve a process of supranational convergence.
  • There is a special need of coordination of the largest economies in order to avoid risks. This implies that certain countries must have an important presence in the coordination forums to reduce this kind of political risk.
  • Different productive models can be good if they are taking advantage of the local capabilities, however, they can be a systemic problem in the future if the differences are provoked by bad policies.
  • Social Responsibility issues should be considered too when we are analyzing the total value provided by different partners to the union.
  • Structural reforms in every country should be driven to provide a productive model of higher added value. Education and innovation cannot be forgotten.
  • Spain requires to improve its innovation process in order that its economy can converge with other Euro economies.
  • Economic policy is a matter of many coordinated actions searching for a common objective related to the search for a sustainable growth. It is much more than a matter of controlling debt and deficit.

 

 

 Azul Gris 0002Mr. Luis Díaz Saco

Executive President

saconsulting

advanced consultancy services

 

Nowadays, he is Executive President of Saconsulting Advanced Consultancy Services. He has been Head of Corporate Technology Innovation at Soluziona Quality and Environment and R & D & I Project Auditor of AENOR. He has acted as Innovation Advisor of Endesa Red representing that company in Workgroups of the Smartgrids Technology Platform at Brussels collaborating to prepare the research strategy of the UE

 

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