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Eurozone: Thrifty Ants bailing out Profligate Grasshoppers?

One of the most popular narratives of the Greece-Eurozone crisis is that the hard working Germans and Eastern Europeans are asked to bail out the overspending Greeks. In most cases this narrative is based upon nothing but pure prejudice. Most Northerners and Easterners visit Greece during the summer season, and spend their time relaxing and enjoying themselves. There is an observation bias in assuming that the Greeks themselves do the same. In fact they work the overheated kitchens, prepare the gyros, clean the rooms, navigate the ferries, and generally work in overlapping shifts during the entire season. As we have shown in our blogpost refuting the most popular myths about the lazy and corrupt Greeks, they work more hours per year than do Germans according to Eurostat.

There is, however, a widespread myth that is seemingly based on facts. It goes something like this: “Poor Eastern European Eurozone member states (Estonia, Latvia, Lithuania, Slovakia, Slovenia) have now reached the level of development of Greece, yet their pensions are only a fraction of Greek pensions. Why should they be asked to bail out Greece?” There is also a German version of this myth (it most likely originates from the German press in fact), which claims that “Greek pensions are higher than German ones, even thought Greece is a poorer country”.

Let us consult the data and see if we can find any evidence of these stories being backed up by facts. What we can do is to compare the GDP per capita of Eurozone member states with their per capita spending on pensions, both measured on purchasing power parity (i.e. adjusted to the price levels in those countries). Fortunately Eurostat publishes comparable data on per capita pension here. (You have to set the units to purchasing power standard per inhabitant.) Unfortunately, there are no comparable figures for 2015 or 2014, after Greek pensions have been cut by almost 50% as part of the austerity packages of recent years.

But we can still compare the last year before the crisis and the beginning of the devastating austerity that destroyed the Greek economy. Let us see how it looked in the year 2009.

 

Screenshot 2015-07-21 19.09.52

Output per head compared to pensions per head, 2009, both adjusted to local price level

 

What we see on the graph is that Greek pension levels were in line with general European trends in 2009, that is, they were appropriate for the level of development of the country. The same was true for Baltic pension levels, but in the case of Slovenia and Slovakia pensions were in fact lower than what their output levels would have allowed. This is in line with my observation in my “Open Letter to my Estonian, Latvian, Lithuanian, Slovak and Slovenian Friends” about bailing out Greece, in which I proposed that it was not Greek living standards that were too high compared to their level of development, but Eastern European living standards too low. Eastern European would be better off fighting at home for higher wages, pensions and social assistance than trying to bring down Southern European and overall European standards. I also mentioned that the share of wages to GDP in the five Eastern European OECD member states (where collective agreements coverage is very low) is a full ten percentage points lower than in the 12 Northern, Western and Southern European EU member states where collective agreements cover more than 4/5 of employees. Eastern Europe quite simply has a different model of capitalism than does the West and the North of Europe.

Trade unions with strong rights and wide membership is a prerequisite of the European Social model. This was so in Greece as well, until the Trojka eliminated it, interfering in the internal social structure of a sovereign country. Syriza attempted to restore it, but the current agreement (The Great Ceausescu Plan for Greece) bans it again, interfering in the social fabric of a sovereign nation, banning a practice that is general in Northern and Western Europe. It was also an integral part of the German growth model. (Model Deutschland, leading to the Wirtschafstwunder, the German economic miracle. See the writings of Wolfgang Streeck and Anke Hassel on these issues.)

(Latest example from Bloomberg: in spite of high growth in the Czech Republic, wages lag behind.)

 

 

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