Contrasting Eurozone Economies: The Good, the Bad, and the Corrupt
by Zach Goulet
The European financial crisis that swept the continent in 2008 crippled the economies of some nations and left others relatively unscathed. The countries that were affected the most severely, such as Spain, Portugal, Greece, Ireland, and Italy, exhibited similarities in fiscal and labor policies. These stand in stark contrast to countries such as Germany, whose economy has largely resisted the worst impacts of the crisis. Although myriad factors led to the resilience of the German economy, in the end it was a combination of conservative fiscal policy facilitated by effective means of revenue collection and decentralized labor policies that allowed Germany’s economy to outperform many Eurozone countries during the crisis.
The negative effects were further mitigated by inherent strengths in the structure of the German economy, which lie in its skilled labor force, industrial production, and a large current account surplus. This positive balance comprises a significant portion of German GDP and comes mainly from exports of automobiles and machinery. As Germany accumulated a substantial trade surplus, Spain, Greece, and Portugal have, with the exception of Spain in 2012, only run deficits since 1999.(i) While countries like Greece rely in a large part on tourism, with 15% of GDP and 16.5% of employment coming from this sector in 2007,(ii) Germany’s industrial production accounts for 30% of GDP. In contrast to Ger-many’s thriving economy, Spain, one of the most affected countries, experienced a housing bubble, much like the one experienced in the U.S., on the eve of the crisis.
Differences in labor policy largely defined how well a country’s labor market was able to adjust to the Eurozone crisis. Germany’s collective bargaining organizations negotiate on a firm-by-firm basis, in contrast to the national labor unions found in countries like Italy or Greece, where a single organization negotiates wages for workers across all firms in a sector within their state. While German law contains work-hour limits, the government plays a limited role in the negotiation of worker compensation. In Germany, therefore, wages respond to the supply and demand for labor, while in countries with national labor unions, contracts keep wages much higher than the labor market would dictate.
In Italy there exists a deep-rooted culture of protecting the rights of the worker. This is reflected in the first line of their constitution, which describes the country as a “democratic republic founded on labor.”(iii)While no minimum wage statute exists in Italy, the government gives collective bargaining organizations great leeway in negotiating wages on a sector-by-sector basis. This centralized union system, which kept wages artificially high, prevented labor market flexibility and contributed to unemployment.
Germany’s labor unions are much more decentralized than those of Greece and Italy. While entire sectors of workers are represented in the Deutsche Gewerkschaftsbund, or DGB, their wages and contracts are negotiated on a firm-by-firm basis by sub-levels of labor organizations.(iv) This freedom of workers to negotiate with their individual firms, as German economist Christian Dustmann argues, was the reason for Germany’s performance during the crisis. He argues that the decentralized structure allowed for wage concessions that allowed more workers to stay employed.(v)
Aside from labor policies, fiscal policies were a determining factor for the severity of the impact of the crisis on the EU countries. High government spending with insufficient revenue to balance the budget caused many countries to borrow to maintain public programs. Among such countries were Spain, Ireland, Portugal, and Greece.
Germany, however, had a tradition of a conservative fiscal policy. In 2000 the German government passed the Hartz reforms, which cut welfare benefits and reduced government spending.(vi) This reining in of fiscal policy happened early enough that Germany was prepared when the financial crisis hit, allowing the country to suffer only minor consequences. German debt did exceed 60% of GDP during the crisis, but they amended their federal constitution to include a “debt brake” in alignment with the Stability and Growth Pact of the EU in 2009 in order to return to compliance debt levels. While Germany curbed its government expenditure before the nadir of the crisis, Greece, Portugal, Ireland, and Spain were forced to adopt austerity measures only after the impacts of the crisis rocked their countries. In the case of these countries it was too little, too late.
One of the factors that contributed to a high government deficit was the lack of effective budget management and revenue collection. According to the European Institute Hellenic Observatory, the Greek fiscal institutions exhibited “[a] poor mechanism of setting up the budget, and the lack of any systemic monitoring of its implementation.”(vii) This is made clear by the fact that tax evasion causes Greece to lose approximately €30 billion annually.(viii) With an ineffective framework in place to manage public spending, attempts by the EU to control the fiscal policy were ineffective. Rampant corruption in certain Eurozone countries extends to the highest levels of government, exacerbating the problems of a weak financial structure. Transparency International, a corruption watchdog organization, found that corruption costs the Italian economy €60 billion per year. Tax officials in Italy are also known to embezzle government tax revenue, with high-ranking collectors in Italy skimming €100 million in 2012.(ix) A low statute of limitations on tax evasion and corruption charges means that perpetrators are rarely prosecuted and funds rarely recovered.
Largely responsible was former Prime Minister Silvio Berlusconi, who normalized bribery and corruption in Italy by using his power to further his personal and business interests at the expense of the country. With such an ineffective and counterproductive structure in place for collecting revenue it is clear to see why Italy and Greece had trouble adhering to the S.G.P. fiiscal mandate. In contrast, German corruption is ranked twelfth out of 177 countries for lack of corruption by Transparency International, and tax evasion, usually in the form of anonymous Swiss bank accounts, is swiftly punished by authorities.(x)
The Stability and Growth Pact failed to effectively regulate the fiscal policy of member states. Approximately one third of member states violated the terms of the agreement, which was supposed to limit government debt to 60% of GDP. These countries were spending far beyond their means, and in the case of Greece, it resulted in insolvency. The European Union’s goals of enforcing a uniform fiscal policy are put at risk if its members fail to regulate their own revenue collection frameworks.
To address the problem of surveillance and enforcement of regulations on member states, the European Commission established the European Supervisory Authorities in order to achieve compliance with the Stability and Growth Pact. As part of these enforcement measures, the European Fiscal Compact was enacted in January 2013, which aims to take a harder line with coordinating the fiscal policies of member countries. Under the new treaty all members must submit a budget for approval, and members who violate the debt limit will be forced to comply with countermeasures to correct their excessive debt. If they then deviate from these new measures, the Union can impose fines. The effectiveness of this new agreement is yet to be determined. The underlying causes of the fiscal problems in these countries, being mainly the ineffective means of combating corruption and tax evasion, have yet to be resolved. With that, along with labor policy reform, the struggling economies of the Eurozone have a chance to not only recover, but also to be in a position to avoid future crises. While Germany is by no means a perfect model, its decentralized, multi-strata labor union system, conservative fiscal policy, and institutional consistency could provide a template for countries like Spain, Italy, Greece, and Ireland in enacting their reforms. A political shift is needed throughout the Eurozone, where countries stop turning a blind eye, and begin implementing reforms when it is the appropriate time to do so, regardless of whatever political inertia there might be. If the suffering economies of the Eurozone were to make these changes, then the resulting convergence would bring stability both to the euro and to the continent.
i. Guerot, Ulrike, and Sebastian Dullien. "The Long Shadow of Ordoliberalism: Germany's Approach to the Euro Crisis." European Council on Foreign Relations 1 (2012).
ii. Hellenic National Statistics Agency. December 2007. Retrieved February 2014.
iii. Italian Constitution, Article I.
iv. Dribbusch, Heiner , and Peter Birke. "Trade Unions in Germany." Friedrich Ebert Siftung 1 (2012).
v. Dustmann, Christian, Uta Schonberg, Bernd Fitzenberger, and Alexandra Spitz-Oener. "From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy." Journal of Economic Perspectives 28 (2014): 167-188.
vi. Reisenbichler, Alexander , and Kimberly Morgan. "How Germany Won the Euro Crisis." Foreign Affairs.
vii. Kaplanoglou, George, and Vassilis Rapanos. "The Greek Fiscal Crisis and the Role of Fiscal Governance." European Institute Hellenic Observatory 48 (2011).
viii. "A National Sport No More; Greek Taxation." The Economist, November 3, 2012.
ix. Scherer, Steve. "Italy Needs Anti-Corruption Authority - Transparency International." The Star (Toronto), August 6, 2012.
x. Dahlkamp, Jurgen, Conny Neumann, Horand Knaup, and Jorg Schmit. "High-Profle Catalyst: Tough Times Ahead for German Tax Evaders." Der Spiegel, April 30, 2013.
by Zach Goulet
The European financial crisis that swept the continent in 2008 crippled the economies of some nations and left others relatively unscathed. The countries that were affected the most severely, such as Spain, Portugal, Greece, Ireland, and Italy, exhibited similarities in fiscal and labor policies. These stand in stark contrast to countries such as Germany, whose economy has largely resisted the worst impacts of the crisis. Although myriad factors led to the resilience of the German economy, in the end it was a combination of conservative fiscal policy facilitated by effective means of revenue collection and decentralized labor policies that allowed Germany’s economy to outperform many Eurozone countries during the crisis.
The negative effects were further mitigated by inherent strengths in the structure of the German economy, which lie in its skilled labor force, industrial production, and a large current account surplus. This positive balance comprises a significant portion of German GDP and comes mainly from exports of automobiles and machinery. As Germany accumulated a substantial trade surplus, Spain, Greece, and Portugal have, with the exception of Spain in 2012, only run deficits since 1999.(i) While countries like Greece rely in a large part on tourism, with 15% of GDP and 16.5% of employment coming from this sector in 2007,(ii) Germany’s industrial production accounts for 30% of GDP. In contrast to Ger-many’s thriving economy, Spain, one of the most affected countries, experienced a housing bubble, much like the one experienced in the U.S., on the eve of the crisis.
Differences in labor policy largely defined how well a country’s labor market was able to adjust to the Eurozone crisis. Germany’s collective bargaining organizations negotiate on a firm-by-firm basis, in contrast to the national labor unions found in countries like Italy or Greece, where a single organization negotiates wages for workers across all firms in a sector within their state. While German law contains work-hour limits, the government plays a limited role in the negotiation of worker compensation. In Germany, therefore, wages respond to the supply and demand for labor, while in countries with national labor unions, contracts keep wages much higher than the labor market would dictate.
In Italy there exists a deep-rooted culture of protecting the rights of the worker. This is reflected in the first line of their constitution, which describes the country as a “democratic republic founded on labor.”(iii)While no minimum wage statute exists in Italy, the government gives collective bargaining organizations great leeway in negotiating wages on a sector-by-sector basis. This centralized union system, which kept wages artificially high, prevented labor market flexibility and contributed to unemployment.
Germany’s labor unions are much more decentralized than those of Greece and Italy. While entire sectors of workers are represented in the Deutsche Gewerkschaftsbund, or DGB, their wages and contracts are negotiated on a firm-by-firm basis by sub-levels of labor organizations.(iv) This freedom of workers to negotiate with their individual firms, as German economist Christian Dustmann argues, was the reason for Germany’s performance during the crisis. He argues that the decentralized structure allowed for wage concessions that allowed more workers to stay employed.(v)
Aside from labor policies, fiscal policies were a determining factor for the severity of the impact of the crisis on the EU countries. High government spending with insufficient revenue to balance the budget caused many countries to borrow to maintain public programs. Among such countries were Spain, Ireland, Portugal, and Greece.
Germany, however, had a tradition of a conservative fiscal policy. In 2000 the German government passed the Hartz reforms, which cut welfare benefits and reduced government spending.(vi) This reining in of fiscal policy happened early enough that Germany was prepared when the financial crisis hit, allowing the country to suffer only minor consequences. German debt did exceed 60% of GDP during the crisis, but they amended their federal constitution to include a “debt brake” in alignment with the Stability and Growth Pact of the EU in 2009 in order to return to compliance debt levels. While Germany curbed its government expenditure before the nadir of the crisis, Greece, Portugal, Ireland, and Spain were forced to adopt austerity measures only after the impacts of the crisis rocked their countries. In the case of these countries it was too little, too late.
One of the factors that contributed to a high government deficit was the lack of effective budget management and revenue collection. According to the European Institute Hellenic Observatory, the Greek fiscal institutions exhibited “[a] poor mechanism of setting up the budget, and the lack of any systemic monitoring of its implementation.”(vii) This is made clear by the fact that tax evasion causes Greece to lose approximately €30 billion annually.(viii) With an ineffective framework in place to manage public spending, attempts by the EU to control the fiscal policy were ineffective. Rampant corruption in certain Eurozone countries extends to the highest levels of government, exacerbating the problems of a weak financial structure. Transparency International, a corruption watchdog organization, found that corruption costs the Italian economy €60 billion per year. Tax officials in Italy are also known to embezzle government tax revenue, with high-ranking collectors in Italy skimming €100 million in 2012.(ix) A low statute of limitations on tax evasion and corruption charges means that perpetrators are rarely prosecuted and funds rarely recovered.
Largely responsible was former Prime Minister Silvio Berlusconi, who normalized bribery and corruption in Italy by using his power to further his personal and business interests at the expense of the country. With such an ineffective and counterproductive structure in place for collecting revenue it is clear to see why Italy and Greece had trouble adhering to the S.G.P. fiiscal mandate. In contrast, German corruption is ranked twelfth out of 177 countries for lack of corruption by Transparency International, and tax evasion, usually in the form of anonymous Swiss bank accounts, is swiftly punished by authorities.(x)
The Stability and Growth Pact failed to effectively regulate the fiscal policy of member states. Approximately one third of member states violated the terms of the agreement, which was supposed to limit government debt to 60% of GDP. These countries were spending far beyond their means, and in the case of Greece, it resulted in insolvency. The European Union’s goals of enforcing a uniform fiscal policy are put at risk if its members fail to regulate their own revenue collection frameworks.
To address the problem of surveillance and enforcement of regulations on member states, the European Commission established the European Supervisory Authorities in order to achieve compliance with the Stability and Growth Pact. As part of these enforcement measures, the European Fiscal Compact was enacted in January 2013, which aims to take a harder line with coordinating the fiscal policies of member countries. Under the new treaty all members must submit a budget for approval, and members who violate the debt limit will be forced to comply with countermeasures to correct their excessive debt. If they then deviate from these new measures, the Union can impose fines. The effectiveness of this new agreement is yet to be determined. The underlying causes of the fiscal problems in these countries, being mainly the ineffective means of combating corruption and tax evasion, have yet to be resolved. With that, along with labor policy reform, the struggling economies of the Eurozone have a chance to not only recover, but also to be in a position to avoid future crises. While Germany is by no means a perfect model, its decentralized, multi-strata labor union system, conservative fiscal policy, and institutional consistency could provide a template for countries like Spain, Italy, Greece, and Ireland in enacting their reforms. A political shift is needed throughout the Eurozone, where countries stop turning a blind eye, and begin implementing reforms when it is the appropriate time to do so, regardless of whatever political inertia there might be. If the suffering economies of the Eurozone were to make these changes, then the resulting convergence would bring stability both to the euro and to the continent.
i. Guerot, Ulrike, and Sebastian Dullien. "The Long Shadow of Ordoliberalism: Germany's Approach to the Euro Crisis." European Council on Foreign Relations 1 (2012).
ii. Hellenic National Statistics Agency. December 2007. Retrieved February 2014.
iii. Italian Constitution, Article I.
iv. Dribbusch, Heiner , and Peter Birke. "Trade Unions in Germany." Friedrich Ebert Siftung 1 (2012).
v. Dustmann, Christian, Uta Schonberg, Bernd Fitzenberger, and Alexandra Spitz-Oener. "From Sick Man of Europe to Economic Superstar: Germany's Resurgent Economy." Journal of Economic Perspectives 28 (2014): 167-188.
vi. Reisenbichler, Alexander , and Kimberly Morgan. "How Germany Won the Euro Crisis." Foreign Affairs.
vii. Kaplanoglou, George, and Vassilis Rapanos. "The Greek Fiscal Crisis and the Role of Fiscal Governance." European Institute Hellenic Observatory 48 (2011).
viii. "A National Sport No More; Greek Taxation." The Economist, November 3, 2012.
ix. Scherer, Steve. "Italy Needs Anti-Corruption Authority - Transparency International." The Star (Toronto), August 6, 2012.
x. Dahlkamp, Jurgen, Conny Neumann, Horand Knaup, and Jorg Schmit. "High-Profle Catalyst: Tough Times Ahead for German Tax Evaders." Der Spiegel, April 30, 2013.
