European Tribune - Community, Politics & Progress.

LQD: Dani Rodrik on the Euro

by Metatone
Mon May 12th, 2008 at 03:31:14 AM EST

Dani Rodrik is one of the most thoughtful economists around. He has a very short piece with an interesting graph on the Euro:

Dani Rodrik's weblog: Italian doldrums

To me the EU is the most impressive achievement of international economic statecraft in the second half of the 20th century. But clearly not everything is hunky-dory, and Italy's performance of late has been particularly disappointing. I found the chart below, from one Bruegel's publications, particularly striking:

He goes on to note that Italy would appear to have undergone exchange rate appreciation that might be causing, in part, the decline in exports.

Further, like all economists, he then points out that within an EU state, such conditions would be causing migration of workers (say from Italy to Germany), but the Eurozone lacks (to some degree) this kind of adjustment mechanism (among others).

I'd add a different twist though, given what we know about unemployment in the former East Germany and immigration patterns across Europe as a whole, I'm not convinced that at this time workforce migration would be a significant adjustment potential anyway.

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LQD: Dani Rodrik on the Euro | 11 comments (11 topical, 0 editorial, 0 hidden)

Re: LQD: Dani Rodrik on the Euro (none / 1)

So what the graph is saying is that the star export performers are Germany, Ireland, Austria, and Finland, but that Ireland is unique in having achieved this despite a 15% real currency appreciation. (By that I presume he means inflation relative to the average - given all are in EU?)

Virtually all the other countries have experienced both relative inflation and relative decline in exports - with the worst being Italy.

The general rule is thus (as one would expect) that relative inflation leads to a relative decline in exports - with Ireland being a special case exception because of its exceptional growth due to its ability to attract very high quality companies to its shores over that period. Belgium has stagnated despite no relative inflation.

So what is the overall message for policymakers? Long term growth within a currency zone depends on controlling your cost base? It's not clear from your diary what point you are trying to make.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Mon May 12th, 2008 at 04:33:48 AM EST

Re: LQD: Dani Rodrik on the Euro (none / 0)

Virtually all the other countries have experienced both relative inflation and relative decline in exports

Well, five out of seven (that's less than three quarters, 71.4%) is no "virtually all" in my book :-) And the difference of those two countries is interesting, them being the two 'port countries' of the EU: the Netherlands (modest export growth despite appreciation) and Belgium (significant export reduction despite modest currency depreciation). Maybe gas exports make the difference. The relative ration for the Iberian countries and France is also noteworthy; I guess the former being quasi developing countries, and receiving EU funds, are factors, and parallel Ireland.

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Mon May 12th, 2008 at 05:16:51 AM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 1)

I took the Netherlands and Belgium to be basically average on export growth and inflation respectively - as they are so close to the average - and so took the remaining 5 countries which correlated greater inflation with lesser export growth - and the 4 countries which showed lesser inflation with greater export growth - as demonstrating an inverse correlation between relative inflation and export growth. The only significant exception to this correlation amongst the 11 countries is then Ireland, which is also one of the smallest economies listed. I will leave it to the statistical experts to calculated the significance of the correlation

In any case, I am asking the question as to whether this is the most salient point to take from the graph, not making the assertion that it is.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Mon May 12th, 2008 at 08:34:36 AM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 0)

I took the Netherlands and Belgium to be basically average on export growth and inflation respectively

But they aren't on the other scale. You can't dismiss them from the analysis for that reason.

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Mon May 12th, 2008 at 11:35:17 AM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 0)

Even if you include them you are talking about 8 out of 10 not 5 out of 7 countries exhibiting a strong inverse correlation between average inflation and export growth.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Mon May 12th, 2008 at 11:48:49 AM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 0)

8 out of 11 :-)

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Mon May 12th, 2008 at 01:34:43 PM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 0)

In fact, just 7 out of 11: Finalnd is the mirror image of Belgium.

*Traitor*, n.
A benighted individual who perceives an illusory distinction between serving his nation and abetting the criminals who govern it.

by DoDo on Mon May 12th, 2008 at 01:36:14 PM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 0)

a. I always said Ireland was the clear exception.
b. Thus if you include Belgium, you have to include Finland?

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Mon May 12th, 2008 at 06:15:25 PM EST
[ Parent ]

Re: LQD: Dani Rodrik on the Euro (none / 1)

I'm not trying to make any points. It was just something interesting I stumbled across.

Rodrik has a slightly less enthusiastic description of Ireland on the page:

Dani Rodrik's weblog: Italian doldrums

(What about Ireland in the picture above, some of you may ask. Ireland has experienced both an appreciation and an export boom. Well, that is what is called an "equilibrium real appreciation": the real exchange rate movement is the result of export performance, not the other way around.)

by Metatone (metatone [a|t] gmail (dot) com) on Mon May 12th, 2008 at 08:27:09 AM EST
[ Parent ]

Let's not forget (4.00 / 4)

that these are relative movements. The important point to note is that pretty much agreed that the DM entered the euro as a significantly overvalued rate, and the Germans had to pay for that sin (of pride) via lower wage growth for the next several years, to compensate for that. Whether that lower standard of living for several years was worth it can only be seen over a longer period.

But they went beyond the need to reach some kind of "wage parity", and are now at a competitive advantage in that respect. The solution is simple: lower growth rates for wages in other countries.

I'll simply note that this can happen via wage increases in Germany.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (jeromeguillet@yahoo.fr) on Mon May 12th, 2008 at 08:54:45 AM EST

Re: Let's not forget (none / 0)

Internally yes, but given that the Euro is appreciating against all other currencies that would exacerbate problems of competitiveness for exports outside the Euro area.

"It's a mystery to me - the game commences, For the usual fee - plus expenses, Confidential information - it's in my diary..."

by Frank Schnittger (mail Frankschnittger at hot dotty communists) on Mon May 12th, 2008 at 06:17:47 PM EST
[ Parent ]

LQD: Dani Rodrik on the Euro | 11 comments (11 topical, 0 editorial, 0 hidden)

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