UBS Reveals Who Really Won The Euro — And Why This Is Creating A Huge Political Problem

The hot read in Euro-economics this week was a note from UBS’ Paul Donovan titled Who wins with the Euro? (Both ZeroHedge and FT Alpha have written about it)

The question is controversial, because there’s some insinuation that whoever “won” the euro should now be in a position to make concessions helping those who lost.

Usually the argument goes: Germany has been the big winner from the euro, and now it’s time to pay back the periphery.

And there’s a good argument to be made on that front, especially if you look at historical trade data, and see that the German export monster pretty much clobbered everyone else in the bloc, causing them to run big deficits, while Germany boomed via vendor financing.

But Donovan’s note looks instead at which countries saw the highest real disposable income gains from the time the Euro was established through 2010.

What this chart shows is Real Disposable (after-tax) Household Income Growth in each country by income decile.


Photo: UBS

So for example, you can see that all strata of the Greek economy saw income surge significantly, and that the poorest have done the best. In the Netherlands, the poorest went down during the decade, but the richest went up. All the deciles in Germany and Austria fell (essentially meaning that inflation stripped out wage growth for everyone), whereas Finland, Portugal, and Spain saw widespread gains for just about everyone.

It’s a controversial chart since Greece, Spain, and Portugal as all stand out as being winners.

Donovan identifies why this is a big problem.

This chart unfortunately plays into the hands of the more nationally minded politicians of the Euro core. The argument can be made (and increasingly is being made) that periphery economies must simply accept the declines in living standards that their non-periphery counterparts have had to accept. Lower living standards in the sense of real disposable income implies either lower wages, or yet more fiscal austerity, or indeed both measures in combination. Why should Germany see its living standard decline to pay to maintain the Greek, Spanish or Portuguese living standard, when those standards rose by so much in the recent past? As a political sentiment it has a ready populist appeal. 

However, such an interpretation is not entirely fair. The countries that have experienced some moderation in their living standards are generally those that had the highest absolute disposable income levels in the first place. Someone occupying the bottom decile of French income distribution has twice the level of income of someone in the bottom decile of Greek income distribution in 2010.
The income inequality between countries in the Euro area has been narrowed by the pattern of real disposable income growth (as a rule). In what is supposed to be a common enterprise, there is something disturbing about asking the poorest members of the poorest societies to become even poorer, in order to enhance the living standards of the richest societies. As the Italian Prime Minister has had occasion to point out, there may also be a natural limit to the extent to which such demands can be placed on poorer societies (or the poorest in societies) without creating a threat to civil order.

The problem is that this debate cuts both ways, using exactly the same argument. Why should one group of countries force another group of countries to accept lower living standards? This question could be asked by Germans of the Greeks (why should we see our taxes rise / disposable income fall to maintain your level of disposable income?). This question could be asked by the Greeks of the Germans (why should we see greater income inequality when we are already amongst the poorest in the Euro area, and suffer from a Germano- centric rather than a Helleno-centric monetary policy?). Both questions have a degree of validity. It does not make finding a solution any easier.

The other problem is that the “gains” made in the periphery were fuelled, at least in part, by a bubble. Borrowing costs collapsed in those countries when the Euro was established, and investment money, and lending came rushing in. It’s one reason the system is in such a mess. So to declare Greece, Portugal, and Spain “winners” of the Euro is a little bit like declaring Stockton, California and Phoenix, Arizona “winners” from the housing boom. It’s true… until you go a little bit further. And that collapse was always probably inevitable

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