Monday 18 January 2010

The EU - A Success Story

This is not the kind of headline you are likely to get in the mainstream media in the UK. Nevertheless there are good solid grounds for claiming that the EU is indeed a success story. The basis for this is a comparison with the US economy. The USA is usually held up as an example of an innovative, dynamic and growing economy, often to highlight perceived weaknesses in the EU. Turns out that this is not in fact the case.

Paul Krugman, the well-known American economist, in a recent article in the New York Times analyses the headline figures and comes up with some surprising facts. For example the headline figure most commonly used shows that since 1980 America’s real Gross Domestic Product (GDP) has grown, on average at 3 % per year. While the EU15 (the 15 member states before the EU enlarged to include most of the former communist east) has grown only by 2.2% a year. However as Krugman points out, “All this really says is that we’ve had faster population growth. Since 1980, per capita real GDP - which is what matters for living standards - has risen at about the same rate in America and the EU15: 1.95% here; 1.83% there.” In fact once you take into consideration that American workers work longer hours than their EU counterparts, then real GDP per hour worked may be higher in the EU15 than in the USA.

Krugman also looks at technology and jobs and once again finds that there is very little difference, if any, between the USA and the EU. He notes for example that, “Broadband, in particular, is just about as widespread in Europe as it is in the United States, and it’s much faster and cheaper.” As regards jobs, while unemployment rates are usually higher in the EU, when it comes to adults working, once again there is little difference. As Krugman points out, “In 2008, 80 percent of adults aged 25 to 54 in the EU15 were employed. That’s about the same as in the United States.”

Thus in economic terms it seems that the EU is at least as successful as the USA. The differences are much more to do with collective choices about the balance between work and leisure time, family time as Krugman prefers to call it. As he puts it, “ Europeans are less likely than we are to work when young or old, but is that entirely a bad thing?”

In a much earlier article for the New York Times, Krugman looked in some detail at the differences in lifestyle between a typical middle-class family in France and one in the USA. This, according to Krugman, shows that while the French family would have lower disposable income and therefore lower personal consumption, there are corresponding compensations. “Because French schools are good across the country, the French family doesn't have to worry as much about getting its children into a good school district. Nor does the French family, with guaranteed access to excellent health care, have to worry about losing health insurance or being driven into bankruptcy by medical bills.

Perhaps even more important, however, the members of that French family are compensated for their lower income with much more time together. Fully employed French workers average about seven weeks of paid vacation a year. In America, that figure is less than four.”

Krugman concludes this article by referring to resarch by Alberto Alesina and Edward Glaeser, at Harvard, and Bruce Sacerdote, at Dartmouth, who have it seems gathered some statistical evidence that working fewer hours makes Europeans happier, despite the loss of potential income.

So, there is some clear evidence that the EU is not just an economic success story, but has brought significant benefits to its citizens.

Europe’s OK; the euro isn’t.

This is the title of an entry in Krugman’s own blog. In it he voices his concerns about the long term viability of the single currency. The main worry is how will the EU adjust to asymmetric shocks. How will euro zone countries that have been much harder hit by the downturn than others react? With no currency of their own to devalue, there is no easy answer.

As Krugman puts it: “In the United States, such shocks are cushioned by the existence of a federal government: the Social Security and Medicare checks keep being sent to Florida, even after the bubble bursts. And we adjust to a large degree with labor mobility: workers move in large numbers from depressed states to those that are doing better.”

Krugman’s point is that the EU lacks these two essential features that help to make a single currency work. Namely a centralized fiscal system and high labour mobility.

Now to challenge as esteemed an economist as Krugman is a pretty rash thing to do, but here goes anyway. It is true that there is no centralized fiscal system nor a centralized social security or health system. However all EU countries have their own systems. And, as Krugman very well knows, for at least the EU15 countries, these systems provide unemployment, pensions and health benefits far more generous that those on offer from the US government. If a country’s social welfare system was adequate enough before the advent of the euro, I do not see why is would cease to be so now.

This leaves labour mobility - the willingness and ability of workers to move from depressed areas to those that are doing better. Now this seems undisputably higher in the USA than in the EU. However there are a number of caveats to this. In the first place fully reliable facts seem to be in short supply regarding labour mobility. A recent report from the European Commission - Labour mobility between the regions of the EU-27 and a comparison with the USA - had to rely on indirect indicators. The key one was the “share of the working age population who changed their region of residence within the previous year.” Clearly this information can only come from some kind of sampling. For what it’s worth this report found that internal mobility in the USA at 2% was approximately double that for the EU15, which was 1.15%.

Interestingly all the sources I researched mentioned that lower labour mobility is a factor within member states. As the above mentioned report puts it: “In the EU, the tendency for workers and people in general to move to another EU country or to another region of the same country is much lower. This applies to both the old and the new Member States, irrespective of their economic development or the openness of their labour market.” I find this rather strange as it very much contradicts the general consensus regarding Scotland. Just about everyone knows lots of people who have left Scotland to live in other parts of the UK, while movement further afield - either to Europe or the USA or the old Commonwealth - is far from uncommon. Scotland has always been known as a country that exported people. Labour mobility as such is almost impossible to pin down, however the Registrar General does keep data on general mobility. And the figures for in and out migration to and from Scotland from the rest of the UK and from overseas for the five years to 2008 show that each year on average 91,000 people or 1.82% of Scotland’s total population moved into Scotland. At the same time on average each year a further 77,000 people or 1.54% moved out of Scotland. These rates are not too different from the internal mobility rates for the USA.

Another point I would make is that labour mobility rates in Europe have changed considerably over the decades since the end of the second world war. Both Spain and Italy experienced considerable internal and external migrations in the 50s, 60s and 70s as people from southern Italy, southern Spain and Galicia moved in their hundreds of thousands year after year to the more industrialised north. This decade has seen quite significant movements of people from the new member states in Eastern Europe to EU15 countries. Something in the order of over half a million people were moving west each year. The stories about the legendary Polish plumbers must have had some basis in fact.

All this is by way of saying two things. One is that there may well be more labour mobility in the EU than academic research estimates. The second is that in some ways it is the very success of the EU with its relatively generous welfare provisions that keeps labour mobility lower than in the USA. This is borne out by a recent study into patterns of migration in Spain - Migration in Spain: Historical Background and Current Trends by Olimpia Bover and Pilar Velilla from the Bank of Spain. The authors found that in recent decades high unemployment no longer triggers migrations to more prosperous regions. Following the expansion of the welfare state, registered unemployed in the traditionally poor and high unemployment regions (Andalucia and Extremadura) rarely change regions. If anything movement is in the opposite direction. The authors found evidence that: “People that move now between regions are people with higher education and they seem to do so in search of cheaper housing, better quality of life and perhaps professional promotion.” This is why the better-off regions like Madrid and Catalunya have become net outmigration regions.

This is a particularly interesting study as it shows how patterns and rates of migration within and outwith countries change over time. Simplistic notions of labour mobility are a bit of a distraction from the real efforts needed to make sure the euro is a long term success.

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