Tuesday, October 18, 2011
Eurostat came out with preliminary inflation numbers for September: at 3% year over year, it's not exactly flirting with deflation. Even the number excluding food and energy is 1.6%: lower, certainly, but not imminently threatening to become negative either. But what really caught my eye was some of the nation-level stats, which caused me to make the following chart of the overall price level for the PIIGS countries, as well as for three "core" countries: Germany, France, and the Netherlands.
So the conventional account of the Eurozone's woes, or at least conventional in the US econoblogosphere, goes as follows. As a result of the common currency, peripheral countries that used to have high interest rates gained much lower interest rates. This attracted big capital inflows in the nineties and aughties and caused property booms and ultimately housing bubbles in those countries. As a result, their economies overheated and their costs grew out of line with Germany/France/etc (at least relative to productivity). In 2008 the housing bubbles were all burst, and now the peripheral countries have depressed economies. What they really need to do is devalue their currencies (to restore competitiveness) but they can't because of the common currency. Instead, they need to go through a long and painful period of internal devaluation to bring costs back in line with where they should be. This will be accomplished by the depressed state of their economies causing wage/price levels to sag relative to the core countries. Also, in this account of things, the ECB has been unhelpful by raising rates too high (in order to prevent inflation in Germany and France), while letting the poor peripheral countries go to the dogs of internal deflation.
I've seen more-or-less this account from across the political spectrum - from Paul Krugman rightward at least as far as Megan McArdle.
However, if that picture of what is happening were fully accurate, we would expect to see the PIIGS countries at the bottom of the chart, with inflation below the Eurozone average (the heavy black line), while the core countries would be a bit above the average. But that's not what we see at all - instead Greece and Spain are at the top of the chart and France, Germany, and the Netherlands, are all below the average. Only Ireland appears to be behaving in the expected manner.
You might object that the chart above, which uses Eurostat's 2005 basing for the price levels, mixes pre- and post-bust data and is thus confusing the issue. To assess this I rebased all the numbers on July 2008 = 100 and redrew the graph since then:
The trend is a little less pronounced but it's still basically the same deal: with the marked exception of Ireland, the peripheral countries have higher inflation than the core countries.
Why is that?