Thursday, 6 June 2013

The creeping desert

I wrote a post the other day that caused something of a stir. In it I argued that migration of the young & skilled from southern European countries could mean that those left behind face a very bleak future. Several people took issue with this, arguing that the migrants would send back enough money to support their parents and regenerate the economy. This to my mind ignores current demographic reality, and perhaps more importantly, the particular structural problems in the Eurozone. And some people seemed unclear about my argument. So in this post, I shall explain the reasoning behind my bleak assessment of the future for the Eurozone periphery. 

I am emphatically NOT arguing that there is anything intrinsically wrong with young, skilled people leaving in search of a better life elsewhere. Migration benefits both the migrants and the receiving countries. Immigration is a GOOD thing for countries that have ageing populations and skills shortages - as most Western countries do. Germany, for example, would unquestionably benefit from inflows of skilled young people from the Southern European countries. And it would be quite wrong in my view to prevent young people faced with high unemployment in their home country from going elsewhere to find work. Nor would it be right to prevent skilled people facing falling wages in their home country from going to countries where the pay is better. But where people can freely move to other countries, as is the case in the European Union, the sort of "Internal devaluation" that forces down wages in search of "competitiveness" inevitably causes migration when the same jobs in Greece and Germany pay vastly different wages. Unfortunately it is this sort of "internal devaluation" that has been forced on the Eurozone periphery because their membership of the Euro prevents them from devaluing their currencies vis-a-vis their main trading partners, which is the usual means by which countries restore competitiveness. 

Traditionally, young migrants send money back to their parents. This is because the traditional social contract is that children are cared for by their parents when they are young, and in turn are then responsible for supporting their parents in their old age. But in the West, with pension and healthcare systems that support the old, the explicit contract between children and parents is weakened. Children are a direct cost to their parents, but children's financial support of parents in their old age now comes largely through payment of taxes, and the old expect to provide for their own retirements by saving and paying taxes during their working lives. I think this is at least partly the cause of the falling birth rate. And I think it severely weakens the ties between older and younger generations. Older generations hold on to wealth rather than redistributing it to the young, because they need that wealth to support them in their old age. Meanwhile the young don't see the need to support the old directly - and the old don't expect to be supported directly - because the old have much more wealth and are extensively supported by the state. This last is the most poisonous as far as young migrants supporting the elderly back home is concerned. I don't have evidence to support this but I think that young migrants are much more likely to send money home when there is little state pension or healthcare provision in their country of origin. If they believe that the state will support their parents, they may not send money home. 

In the Eurozone, therefore, we would expect to see migration of young skilled people from areas of high youth unemployment and falling wages. And indeed this does appear to be happening. The problem is that the people left behind are older, less able and lower skilled, which makes these countries less attractive to businesses. After all, why would a business choose to locate itself somewhere where the local workforce is ageing and poorly skilled? So businesses would go elsewhere too. That would cause GDP to shrink further. The population's need for state support would actually increase as it ages and gets sicker, but tax revenue would fall as working people and businesses leave. That adds up to long-term decline and a growing burden on the state's finances. Young people sending money back would mitigate this to some extent but it wouldn't compensate fully for falling GDP: I really don't see how inflows of money from young people to enable their parents to survive could possibly prop up aggregate demand enough to make the country attractive to business. And old people and long-term disabled don't generally pay taxes. So where will the taxes come from to support the welfare systems that these people depend on?

That's bad enough. But there is one final ingredient in this poisonous mixture. Most of these states are already highly indebted. With a growing burden on their healthcare and pension systems and falling tax take due to GDP decline, their debts can only get worse. The fiscal compact gives primacy to debt service over maintaining public services. As I see it, therefore, these states will eventually be forced to dismantle their welfare systems - the pensions and healthcare required by their ageing populations - to avoid debt default. Eventually, I suppose, the old and the unskilled will also leave - if they can, and if any country will receive them. For although the European Union is in theory committed to the free movement of people, I wonder how real that commitment would turn out to be in the face of large-scale migration of pensioners and benefit claimants from the Eurozone periphery. I suspect that free movement of people might turn out to be another of those European laws that are binding in good times but illusory in bad.

Therefore as Krugman said, the combination of labour mobility with internal devaluation and lack of fiscal union in the Eurozone is potentially lethal. There is no possibility of recovery for countries caught in the deadly embrace of high public debt and youth migration. For them, "internal devaluation" actually means creeping desertification. 

Related links:

Ubi solitudinem faciunt, pacem appellant - Jonathan Portes (NIESR)




19 comments:

  1. "Migration benefits both the migrants and the receiving countries."

    It rather depends. I don't think you can make sweeping statements like this as some immigrants are always more acceptable than others.

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    1. I suggest you read the rest of the post. I make exactly that point in the second to last paragraph.

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  2. Whilst this is absolutely true - and a big problem, even for underdeveloped areas within countries (East Germany, England's North, Italy's South,....) there is no solution that would avoid far reaching structural reforms.

    It is impossible to pay a worker the same in Greece and in Germany if the Greek one has to support a myriad of bureaucrats due to all kind of red tape, especially if (a) wage earners are the only one's paying taxes and are therefore hit with a disproportional share, and (b) bureaucrats not only extract rent, but on top of this they make the whole production process more cumbersome and therefore more expensive.

    Likewise, you will see high youth unemployment figures until labour markets are reformed so that (a) you don't ruin your enterprise because you hired the wrong person, or at the wrong time, and you can no longer let them go, and (b) established workers can protect themselves from competition via overly restrictive licensing laws and quota's, not unlike the medieval guilds.

    Ultimately it is in the hand of the established generation who has indeed much to lose to create the environment that allows their children to prosper. They will have international support in doing so, but this support will not be forthcoming unless there is an internal commitment to address the issues that need to be addressed.

    @oditorium

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  3. This has been happening in the US for decades as the States of the northeast and upper Midwest lose population relatively. These relative losses are likely to become absolute soon. At which point they will need to consider withdrawing from the dollar block or the "Union" or both. Alternatively they could embrace their future as wilderness areas and begin actively removing human artifacts (aka blight) as Detroit has done.

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    1. Very important point, Ignim. My brother (on twitter) talked about the "ghost villages" of Maine and New Hampshire. And I read only the other day about Detroit bulldozing housing projects because it has lost so much of its population that it no longer needs them. Puts a different perspective on George Monbiot's idea of "rewilding".

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    2. Paul Antompietri8 June 2013 at 17:24

      This particular point was made in this article as well that you posted on Twitter (http://www.heraldscotland.com/politics/referendum-news/london-calling-the-shots.21228380) re London vs the rest of the UK. Labor mobility + currency union = some places within that union, whether it be single or multinational, becoming a human desert. Everything that happens in the eurozone can be seen within nations. The eurozone just makes the scale bigger, and the lack of strong fiscal transfer mechanisms and a banking union makes the problems worse for the people going through them. Which I think is your overarching point...

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    3. Paul, I absolutely agree.

      The problem that I identify here for the Eurozone is already well-documented on a smaller scale within countries - migration from rural areas to cities. And as you point out, we are also seeing it in the US and UK, which are currency unions. It's not just a problem peculiar to the Eurozone.

      If you look at this as a trade in people (yes, I know this is controversial but bear with me), the quid pro quo for exporting people should be capital inflows, which would revitalise the exporting city/state/country and give it a chance of recovery. Within most currency unions those capital inflows happen in the form of fiscal transfers, though they are often seriously flawed - as they are in both the UK and US, of course. But in the European Union the fiscal transfer mechanism is extremely weak, though not completely absent.

      When there is free movement of people without compensating capital flows, the movement of people is zero-sum: the importing country benefits at the expense of the exporting one. Correcting this requires recognising labour as a legitimate export for which countries - or even smaller areas, such as the North East of England - should be recompensed. Free movement of labour therefore requires fiscal transfers.

      I really should develop this idea further, shouldn't I? It follows from my recent discussion of the financialisation of labour.

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  4. You note that internal devaluation encourages migration from the periphery to the core, but there is also a countervailing tendency to shift jobs from the core to the periphery as wages in the latter drop. This happened in the 80s/90s, in the days of currency devaluation and before wages in the periphery rose. This is why I think you are unduly pessimistic to see migration as an irreversible process leading to doom.

    As you note, the Euro means that wage repression is now the only policy lever. This is a feature not a bug, as it protects capital at the expense of labour. Austerity advances the neoliberal agenda: it privileges multinationals (expect more Siemens and VW plants in the periphery), it advances labour market deregulation, it pushes "structural reforms" (public sector cuts), and it seeks to extirpate the remnants of corporatism (e.g. generous public sector pensions).

    Intra-EU labour migration is not an unintended consequence, arising from the ECB/EU Commission's stupidity or recklessness. It is part and parcel of the design, and so is the transfer of jobs from high to low wage zones.

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    1. David,

      This response sounds as if you are defending the benefits of the gold standard back in the 1930's.

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    2. I'm pointing out how things work, not defending that state of affairs. The whole Euro-neoliberal-austerity framework is repulisve to me, but I don't subscribe to the view that this is being pursued in error as the result of incompetence.

      The gold standard was pursued for so long, despite the dreadful human cost, because it benefited certain interests. Similarly, austerity remains the policy of choice because it continues to deliver results - just not the ones that are publicly claimed.

      The erosion of state pensions is an obvious neoliberal goal. In the UK we are told we cannot afford them due to ageing, which is as untruthful as the claim that public debt is too high. Similarly in the Eurozone, the "sovereign debt crisis" is a golden opportunity to enact the "structural reforms" that will devalue Euro-denominated pensions.

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  5. You say the "traditional" migrant worker remittance response was to help aging parents. But you may find that this was not the only response with the Portuguese and Spanish migrations of the 60s and 70s . Even today emigrant remittances to Portugal (from the million+ luso-decendents in France and the 4 million+ worldwide and the latest post 2007 migration) are a significant component of central bank accounts. The money has for decades gone into buying and developing property as an investment and for the emigrant's retirement or burial rights!

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    1. Spot on, and it's not just in Portugal. The same dynamic has been at work in Ireland and Greece for decades.
      http://fromarsetoelbow.blogspot.co.uk/2013/06/from-huddled-masses-to-property.html

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  6. I can see your point now. You see, I'm Spanish and, seeing that my job prospects in Spain weren't particularly brilliant, I migrated to the UK in 2000. After that, my younger brother, that also faced not particularly brilliant prospects, came to the UK in search of a job and found one. After that, he moved on to Canada. Now my mother thinks the prospects for retirement for herself and my father look pretty bleak in Spain. My mother expected retirement this year that isn't going to happen now, my father is already retired and disabled due to a stroke. So she's enrolling on the language school to get French and English. She already speaks intermediate French and basic English. Even though my father would find it quite hard to migrate to a country that didn't speak Spanish because the stroke affected his command of language. I certainly won't be surprised if the whole family has migrated out of Spain in five years time. I intend to get British citizenship this year in case that the UK gets out of the EU, and being a British citizen can help get my parents into the UK if that's their choice.

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  7. Hi Frances,

    I suggest the real problem is not so much internal devaluation as such, but the fact that austerity is being imposed WITH A VIEW TO BRINGING internal devaluation, and not having the desired effect (or bringing the desired effect much too slowly).

    Devaluations are a perfectly legitimate way of dealing with balance of payments problems, or diverging competitiveness. The pound Sterling was devalued by 25% in 2008 and very few people in the UK noticed. That devaluation would not have “forced down wages” – to use your terminology – by a huge amount.

    Here is a back of the envelope calculation. About 25% of the stuff consumed in the UK is imported. So a 25% devaluation will “force down wages” to the tune of 0.25 x 0.25, i.e. 6.25%. And even that is ameliorated by improved profitability of exporting from the UK.

    As to how quickly periphery costs really are declining, relative to the core, evidence seems to be mixed. According to a recent editorial in the Financial Times, Greece has regained two thirds of the competitiveness it needs to regain. However Bill Mitchell disputes this. He referred me recently to figures which show a complete failure:

    http://epp.eurostat.ec.europa.eu/portal/page/portal/exchange_rates/data/main_tables

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    1. Ralph,

      You've completely missed the point. Can I suggest you read the article again?

      Internal devaluation can only work when labour is sticky, so cannot escape from forcible reduction of wages and/or increased unemployment. This would normally be the case when there are significant barriers to the movement of people, for example between independent countries with immigration controls. Where there are no barriers to the movement of people, people will move from areas of lower wages and less work to areas with higher wages and more work - typically, from rural areas to cities.

      In the European Union, free movement of labour is enshrined in treaty. When countries are devaluing in relation to others by forcing down wages and pursuing strategies that raise unemployment, therefore, migration is inevitable. In the absence of fiscal union and with primacy given to debt service over welfare, the result will be emptying and impoverishment of the countries that are "devaluing".

      So it is not internal devaluation that is the problem, and I did not say that it was. The problem is the structure of the European Union, and in particular the single currency

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    2. I’m baffled as to why “Internal devaluation can only work when labour is sticky, so cannot escape from forcible reduction of wages….”

      There is no fundamental difference between internal devaluation of periphery counties’ “currency”, and devaluing the currency of a country with its own currency (e.g. the UK). And getting the devaluation of the currency of the latter sort of country to work does not require guards to be put at ports and airports to stop emigration.

      You say, “So it is not internal devaluation that is the problem, and I did not say that it was.” The last sentence of your article actually reads: “For them (periphery countries) "internal devaluation" actually means creeping desertification.” Plus you say “…the combination of labour mobility with internal devaluation and lack of fiscal union in the Eurozone is potentially lethal.”. That certainly suggests to me, and I imagine other readers, that you are saying that internal devaluation as such is a problem.

      My point in my above comment was that internal devaluation as such is not a big problem: it’s the way it’s done that’s the problem.

      However we seem to be much nearer each other now. I.e., I fully agree with these phrases in the final paragraph of your above comment: “So it is not internal devaluation that is the problem . . . The problem is the structure of the European Union, and in particular the single currency.”

      As to how to effect devaluation without the concomitant deflation inherent in the EZ’s current attempts at internal devaluation, there is a way of doing that, as I’ve pointed out on my own blog: that’s an enforced reduction of wages, profits and prices in periphery countries. That would be horrendously difficult to do, but then the current attempts at internal devaluation have horrendous effects. So the latter enforced reduction in wages and prices might be the least horrendous option.



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  8. Very interesting. I'm more and more convinced that part of the problem we do the 'beancounting'. We have certain ways in which we think one country contributes to the common good, as well as wellfare in other countries. But we only count certain flows of money. Not the real value transferred, that is often not compensated by money. But how should we promote more thoughtfull beancounting, so we can also more easily draw more correct moral conclusions?

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