November 29, 2012 3:48 pm

Glimmer of hope in Europe’s debt tale

Medical Workers Stage 48 Hour Strike Against Spending Cuts In Madrid...MADRID, SPAIN - NOVEMBER 27: Health workers shout during a demonstration held on the second day of a two day general strike on November 27, 2012 in Madrid, Spain. For the first time, all trade unions have called for a 48 hours general strike for the health©Getty

After the local TV station made all its employees redundant and closed last December, Eva Aguiló said goodbye to her boyfriend and parents and left Majorca to work as an au pair in Bonn.

In doing so, the 32-year-old former TV journalist was playing her small part in a great economic rebalancing exercise across the eurozone. Faced with little or no prospect of a job in her chosen profession, Ms Aguiló, a university graduate, accepted a steep pay cut and decided that working as an au pair in Germany for a British family would hone language skills that she could later use in the tourist industry on her native island.

Current account balances

Current account balances

“Maybe I will study something else, I will have to reinvent myself,” Ms Aguiló says with a sigh.

She is far from alone. Immigration to Germany jumped 15 per cent in the first half of the year to about half a million people with most of them coming from other EU countries. Immigration to Germany from Spain, Greece and other crisis-hit southern states grew at an even quicker pace.

Workers in those countries are being laid off, forced to retrain, emigrate or accept outright pay cuts to keep jobs they already had. Add on the burden of austerity measures that cut unemployment provision and raise indirect taxes, and the result is that the debt crisis has turned into a grim tale of, at best, dashed career hopes and at worst misery and poverty for millions of Europeans.

But amid all the gloom, and beneath the fierce impact of austerity, the countries worst affected by the crisis have also been laying the groundwork for their economic renaissance after the crisis, according to a growing consensus among economists that is reflected in two studies published this week.

If one of the lessons of the crisis is that countries like Spain avoided improving the competitiveness of their labour markets for years, because companies had a ready supply of cheap financing in the form of uniform, low euro-area interest rates, the structural reforms under way are beginning to tackle such imbalances.

Spain, suffering from an unemployment rate of nearly 26 per cent, introduced reforms in July to make it easier and cheaper for companies to dismiss permanent employees – an attempt to tackle a system that left young people and immigrants stuck as temporary employees who could be fired while other workers were protected. Portugal is relaxing protections against dismissal. Italy has already in theory taken action to make its labour market more flexible but dismissals remain subject to court review.

A study by Allianz, the insurer, and another conducted jointly by Berenberg Bank and the Lisbon Council, a think tank, concluded that these and other structural reforms were beginning to bear fruit.

“The bitter medicine that these countries had to take has started to have an effect,” said Michael Heise, chief economist at Allianz. “But the reforms need to continue.”

Both studies rank eurozone countries against each other using several indicators to measure how well they are adjusting and both give high marks to Greece, Spain and Portugal for making significant progress in structural adjustment, with Italy lagging behind in both cases. Ireland scores highly on its adjustment progress in the Berenberg report and less well in Allianz’s assessment.

“By and large, we find a major rebalancing within the eurozone,” the Berenberg study says. “Almost all countries with serious fundamental problems are changing their ways rapidly.”

It adds that its finding “flatly contradicts the occasional assertion that [bailout] support could tempt recipients to slow down their adjustment”.

Competitiveness can be measured in a variety of ways but the most simple one is whether other countries choose to buy a country’s exports. The difference between exports minus imports of goods and services, factor income, such as interest, and transfer payments, is known as the current account.

The current account deficits of Greece, Spain and Portugal have shrunk and Ireland is running a surplus. And while current account and export improvements could simply reflect the domestic collapse in demand, Berenberg and Allianz say the underlying improvements in exports and competitiveness cannot be explained solely by weaker domestic consumption.

The flipside of greater labour market flexibility and productivity in the southern countries is that Germany, which went through its labour reforms in the early 2000s after being dubbed the sick man of Europe, should accept some wage inflation to further cut the gap in competitiveness. There are some signs that this is happening, albeit at a modest rate.

The success of the structural adjustments has been pounced upon by European Commission policy makers who believe that, assuming financial markets remain calm and investment returns, it could represent light at the end of the tunnel.

Holger Schmieding, Berenberg’s chief economist, goes further. He believes the eurozone could emerge from the crisis in 2014 with the fastest per capita growth among the major western countries, because the others will still face fiscal tightening. But that will come only after the “maximum pain” caused by austerity measures is felt this year and into next.

The question is whether Europe’s politicians can carry their electorates with them long enough for people to feel an improvement before the social strains caused by austerity become too great.

“I hope that the crisis won’t be for our whole lives,” says Ms Aguiló, who had never previously lived abroad. “At least my father [still] has a job. We are suffering in my family in the crisis, but there are a lot of people in a much worse situation, people losing their houses.”

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