Sunday, February 28, 2010

Multi-speed Europe or multi-speed USA

One of the reasons I've heard that the Euro cannot stay together is that the countries involved have such different rates of economic growth so that it is impossible to have a coherent monetary policy. Interest rate policies that are suitable to some Euro-members might cause bubbles or stagnant growth in the remaining countries.

So how "different" are these rates, really? If you take the last couple years of growth GDP in the Euro area, you end up with a standard deviation of approximately 1.3-1.7% (sorry to statistics majors for abusing standard deviation).

What about, say, the grand old USA? Doing the same calculations on a state-by-state basis, the GSP (Gross State Product) growth varies with a standard deviation of about 2-2.5%.

So the US manages to survive on a much more varied set of regional economies with a single currency and interest rate policy.

Even if you take into account the ability of the federal government in the US to shift around money, the imbalances tend to mirror approximately the same amounts of money that are shifted around by the EU in structural funds.


Jeremy Holland said...

Interesting analysis. I think the biggest difference is there's more migration across state lines in the US than within europe making the market more flexible and varied. One reason usually given for this is lack of language barriers, but I also think there's less hassle as far as bureaucratic paperwork to move from state to state than to move to a new country here.

I think another important difference is the US federal government has the tools and resources to aid failing states, while the EU might have the resources but it doesn't have the tools.

santcugat said...

Migration might increase regional differences as people move from poorer areas to richer areas. Americans also aren't really into sending money back home like more family oriented cultures, so exporting labor doesn't work as well as it would in poor countries like Mexico.

I'm not certain about the tools for dealing with failed states... I don't see the feds stepping in to dictate fiscal responsibility to California.

Jeremy Holland said...

You're right the federal government is letting California dangle, but should it threaten the economy as a whole, they have the tools and resources to intervene, usually through direct aid to the states. Whether it's politically feasible, is another matter.

As I understand the situation with Greece and the EU, the central European government isn't allowed to bail out failed states, which is why the IMF is brought up or the money would have to come directly from a member state in this case Germany, depriving them of the politcal cover.

Anyway, I think as language skills improve there'll probably be more migration within European countries as people look for better economic opportunities. We'll see.