As Reagan would say, there he goes again. Alan Greenspan is at it again in a recent op-ed he further muddied the waters of monetary debate. Clearly there is no Hippocratic oath for former Fed Chairman. Maybe Greenspan will feel better as we started a mention with his favorite President who did as much harm in fiscal matters as Greenspan has done on monetary matters.
Greenspan begins his piece, "The eurozone is confronted with a crisis of not just labour costs and prices – but culture." So right away he does two things. He blames greedy workers for demanding too much in wages and he suggests that this shortsighted greed may be cultural. Alan Greenspan therefore is not only a bad Fed ex-Chairman he's also a bad ethnologist.
The "cultural" crisis he identifies is the southern eurozone countries. They're cultural profligacy about overpaying those workers! Can't blame them too much it's just that southern culture lacks the sense of fiscal responsibility and discipline of the north. So the crisis is overpayed workers and the spendthrift southern culture that lacks the discipline to cut their pay.
"The burden is primarily on southern Europe, where sovereign bond credit spreads (relative to the German Bund) range from 370 basis points (Italy) to 1,960 basis points (Greece). The northern eurozone countries have tight spreads against Germany – a narrow 40 to 80 basis points for the Netherlands, Austria, Finland and France. There are thus two distinctly defined eurozone areas: in the north and in the south."
What is interesting is that the the wrongheaded thinking Greenspan displays in this piece represents the thinking in the eurozone by countries like Germany, Finland and the Netherlands. If you want to understand why Europe has been so hapless in really dealing with the euro crisis-rather than just a short term fix while the long term problem gets worse-read Greenspan's piece. It is a microcosm of every wrongheaded premise in the politics of austerity.
"The ranking of credit risk spreads by size across the eurozone in 2010 was almost identical to the ranking of the level of unit labour costs (relative to that of Germany), suggesting that the higher labour costs and prices have rendered “euro-south” less competitive and so more subject to credit risk."
"From 1990 through to the end of 1998, euro-south unit labour costs and prices rose faster than in the north. In the years following the onset of a single currency, that pace barely slowed. In fact, the underlying trend was stopped only by the financial crisis of 2008. Since then there have been signs of price level stabilisation in the north and the south."
Price level stabilisation! That's awesome. In other words these unreasonable workers are finally seeing their pay cut! Yet Greenspan worries that "There remains the question of whether most, or all, of the south would ever voluntarily adopt northern prudence. The future of the euro beyond a select group of northern countries with a similar culture will depend on the ability of all eurozone nations to follow suit."
The spendthrift South may never catch up to the North. The "Euro-north has historically been characterised by high saving rates and low inflation, the metrics of a culture that emphasises longer-term investments rather than immediate consumption. In contrast, negative saving rates – excess consumption – have been a common feature of Greece and Portugal since 2003."
Greenspan claims that since joining the EU the North has subsidized the South's "excess consumption", that