Bank runs in Greece could signal the death rattle of the euro zone as we know it. Here's why the whole thing might have been doomed in the first place.
Last week, I shared what I called the funniest graph I'd ever seen about why the euro was toast. It showed that the countries making up the euro zone were more different from each other than basically every random
grab bag of nations you could name, including (unbelievably) every country beginning with the letter "M."
That graph came from Michael Cembalest, chairman of Market and Investment Strategy for Asset Management at JP Morgan. I wondered how our 50 states might compare across these measures of dispersion, despite the fact that the U.S. has not only a monetary union (i.e.: we all use dollars) but also a fiscal union (i.e.: we pay we lots of taxes to the federal government, which doles them out across all 50 states).
Cembalest answered with a second graph, this one showing fiscal transfers between rich states, like California, and poorer states, like Missouri. The graph, pictured below, makes a complicated point very simply. The U.S. federal government uses automatic fiscal transfers, such as Medicaid, to protect the indigent and old and sick, no matter where they reside. The euro zone doesn't have a comparable fiscal union. Instead it has debates about how much the hard-working Germans should bail out the lazy PIIGS (their words, not mine). What Germany might call "a permanent bailout," we just call "Missouri."
This morning, Cembalest sent over five more charts. Together, they explain five big differences between the US and the EU.
The 1st difference is taxes. In the US, people pay most of their taxes to the federal government, which has the power to spend that money on health care, defense, and income security in any state it pleases. If one state has a natural disaster, the feds use this general fund to help with the bill. But in the EU, people pay the overwhelming majority of their taxes to individual countries. Upshot: no fiscal union.
The 2nd difference is labor costs. One key ingredient in the euro crisis is the price of work between the core and the periphery. Spanish wages have gone way up since 1999, making their goods uncompetitive, while German labor costs have not increased since the euro was adopted, which has supercharged their exports. For the euro zone to be workable, Spain and Germany must converge, and that means a lot of pain in Spain. In the US, the two regions with the biggest differences in labor costs -- the southwest and the far west -- are much closer together.
The 3rd difference is income variation: Throughout the 20th century, personal income growth across the U.S. converged dramatically. It's true that New Yorkers tend to earn more than Mississippians, but the difference between regional income isn't what it used to be.
The 4th difference is growth rates: "In theory," Cembalest writes, "the lower the dispersion of growth across countries/regions, the easier it is to maintain a given monetary policy stance for the entire union." In other words, the growth rates of the U.S. states are more similar than the growth rates of countries in the euro zone.
The 5th difference is labor mobility: Basically: We move more of it. That matters because when working people move around, they even out the economic differences between regions of the country. As the regions move toward each other in competitiveness, it reduces the need for fiscal transfers between them (see Difference #3).
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