Tuesday, June 25, 2013
A0.08 (Oudemanhuispoort)
Excessive fiscal spending is regularly cited as a primary cause of the current European sovereign debt crisis. Though this hypothesis explains why the market doubts Greece's and Italy's capacity to repay its debts, measured in terms of their high interest rates on long-term government bonds, it fails to carry to other EMU cases. Spain and Ireland, both of which had lower debt levels than Germany prior to 2007 and ran consistent surpluses under EMU have become targets for speculators who are uncertain about their capacity to avoid debt restructuring, while Belgium has been spared from a significant interest premium despite its pre-crisis debt level of 100% of GDP. In this paper, we develop upon an alternative hypothesis, advanced by Wihlborg, Willett, and Zhang (2010), which better accounts for systemic differences towards EMU countries' exposure to market speculation: imbalances within the current account. We outline that one driver of current account divergence is a country's capacity to limit public sector wage growth, relative to wage growth in the manufacturing sector. Nations that were effective in limiting public sector wage growth in EMU's early years (Austria, Belgium, Finland, Germany and to a lesser extent France) witnessed enhancements in national competitiveness and positive current account balances, while those that were unsuccessful (Greece, Ireland, Italy, Portugal, and Spain) experienced competitive/current-account decline. Using fixed-effect, first-difference panel regressions, we demonstrate that while net government borrowing exhibits an insignificant influence on export growth, rising differentials between public and manufacturing sector wage growth are significantly correlated with export decline. We conclude with a discussion on how corporatist institutions which linked sectoral wage developments together in the surplus countries provided them with a comparative wage advantage vis-à-vis EMU's debtor nations.
