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Bank Austria analysis:
Greece only part of the imbalance in the euro zone

  • Some countries consume too much, others too little
  • Strong rise in wages and lending contributed enormously to the imbalance
  • Deficit countries such as Greece have helped others to surpluses and growth through exports
  • Exit not an option, a significant reform of the euro zone is required instead

A current Bank Austria analysis shows that the problem associated with Greece is just a peak in an imbalance in the euro zone which has developed over the years. "Some consume too much, others too little. Both have blithely continued, until the day of reckoning came", is how Stefan Bruckbauer, Bank Austria's Chief Economist, sums it up. The analysis, which has appeared as part of the "Bank Austria Report" series, makes clear that there is more to Greece's problems than just falsified statistics. This is why the problems associated with Greece's high debt levels have in recent months lead to the biggest crisis in the existence of the euro zone. Greece's withdrawal is not, however, an option as far as Bank Austria's economists are concerned; what is needed instead is a fundamental reform of monetary union.

The essential prerequisite for a monetary union to function is a coordinated economic policy. In the euro zone, however, only monetary policy is coordinated; where fiscal policy is concerned only the essentials, in the form of the stability and growth pact, were agreed, but this has not worked either. The countries in the euro zone thus developed in very different ways. Bank Austria's analysis shows that since 2000, Greece's consumption has increased by 74 percent. In the same period in Germany the increase was just 16 percent. Austria was in the middle, at 31 percent. Growth in consumption in Spain was on a par with Greece, at 66 percent.

Behind this lie widely varying wage trends in the individual countries. In Greece, wages per employee have risen by around 50 percent since 2000, by just 10 percent in Germany. Austria was once again in the middle, on 25 percent. "With an increase in wages five times greater than in Germany, Greece clearly became less competitive, which ultimately resulted in a cumulative balance of payments deficit of 85 percent of GDP since 2000", according to Bruckbauer. "In the same period, Germany achieved a balance of payments surplus of 39 percent of GDP." Portugal and Spain reached similar values to Greece, with minus 82 percent and minus 57 percent respectively. Austria, on the other hand, achieved a 20-percent surplus.

Analyses by Bank Austria economists show that the imbalances in the balance of payments arising from the differences in growth also apply to Austrian foreign trade in the euro zone. Austria thus still achieved a cumulative surplus with Greece from 2000 of 4 billion euros, or 2.1 percent of Greek GDP. It was a similar case with Spain, but the opposite was true for low consuming Germany. Austria had to put up with a deficit of almost 100 billion euros, a good 4.5 percent of German GDP.

In addition to the various income trends, the dynamics of indebtedness contributed to the imbalance, and it wasn't just the government that was responsible. In Greece, government, household and corporate debt has risen by more than 150 percent since 2000, with each sector contributing roughly one third. Germany was the antithesis of this too. In the same period, its indebtedness only increased by 24 percent, with private households keeping their indebtedness constant over ten years. Once again, Austria was in the middle – at home indebtedness rose by 45 percent, with firms contributing slightly more than consumers or government.

Without the euro this imbalance would have been rectified much earlier; some countries would have devalued, others revalued and in the deficit countries interest rates too would have certainly have risen faster and put a brake on indebtedness. At the same time this would have clearly restricted the opportunity for surplus countries to find growth, really only abroad. "Over the last ten years the euro contributed significantly to some countries consuming too much and others too little", said Bruckbauer. "Now the euro is contributing to the imbalance being much harder to redress". Under normal circumstances Greece would have to devalue, but that's not on.

In Bruckbauer's opinion, the euro country's withdrawal from the Greek tragedy is not an option, because it would take monetary union to the brink. The euro's biggest advantage lies in the fact that it has eliminated the exchange rate risk between individual member states, and that outweighs all the current difficulties. Without the euro, in the next few years all the EU countries would have to operate an even more restrictive fiscal policy than would otherwise be expected. According to Bank Austria's economists, in the medium term the monetary union will also have to agree binding coordination of economic policy to correct the manifest problems in the system.

Enquiries: Bank Austria Economics & Market Analysis Austria
Stefan Bruckbauer, Tel. +43 (0) 50505 - 41951
E-mail: stefan.bruckbauer@unicreditgroup.at

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