Myths, Mix-ups, and Mishandlings: Understanding the Eurozone Crisis

Figures & data

TABLE 1 Increase in Indebtedness (Percent of GDP), 2000–2007

	Households	Nonfinancial corp.	Financial corporations	Government	Total debt increase	Real home price index
Belgium	7 (11%)	57	124	–26	162	48.7
Germany	–10 (−25%)	0	33	5	27	–14.0
Ireland	54 (33%)	–13	612	–8	645	52.8
Greece	32 (24%)	13	41	4	90	37.2
Spain	34 (30%)	78	74	–24	162	73.1
France	15 (26%)	20	113	5	152	81.7
Italy	17 (48%)	23	22	–7	55	37.6
Netherlands	32 (53%)	–42	217	–12	195	14.4
Austria	7 (11%)	68	72	–7	140	1.2
Portugal	26 (74%)	12	71	13	122	–11.2
Finland	23 (23%)	–77	70	–11	4	37.7
Eurozone-11	21 (27%)	12	132	–6	159	28.3
Denmark	37 (76%)	60	145	–26	216	57.9
Sweden	24 (25%)	49	70	–10	133	55.3
UK	31 (35%)	–34	367	1	365	63.4
Average	23 (30%)	15	145	–7	176	38.3

Source: Authors’ calculations from Eurostat data (on financial balance sheets [nasa_f_bs]; http://appsso.eurostat.ec.europa.eu/nui/show.do) and from the Organization for Economic Cooperation and Development (OECD) Housing Price Database (for the real home price index) (http://www.oecd.org/eco/outlook/focusonhouseprices.htm).

Note: The percentages in parentheses refer to the proportion of real GDP growth (2000–2007) that can be attributed to higher household indebtedness, as explained in the text.

Figure 1 The Eurozone: The Increase in Sovereign Debt Is Not Associated with Increased Real GDP (2000–2007)

Sources: See sources to Table 1.

Notes: Δ real GDP = the percentage increase in real GDP (2000–2007); Δ government debt = the increase in government debt as a percentage of GDP (during 2000–2007). The (dashed) horizontal line indicates that there is no statistically significant (at 10 percent or less) association between Δ government debt and Δ GDP.

Figure 2 The Eurozone: The Increase in Household Debt Is Associated with an Increase in Real GDP (2000–2007)

Sources: See sources for Table 1.

Notes: The regression line is based on the following ordinary least squares (OLS) regression:

$$\begin{array}{rl}& \mathrm{\Delta }\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{l}\mathrm{G}\mathrm{D}\mathrm{P}=12.47+0{.25}^{\ast }\mathrm{\Delta }\mathrm{H}\mathrm{h}\mathrm{D}\mathrm{e}\mathrm{b}\mathrm{t}+14.53\mathrm{I}\mathrm{r}\mathrm{e}\mathrm{l}\mathrm{a}\mathrm{n}\mathrm{d}-\mathrm{d}\mathrm{u}\mathrm{m}\mathrm{m}\mathrm{y}\\ & {\left(7.22\right)}^{\ast \ast \ast }\left(2.02\right){\left(2.54\right)}^{\ast \ast }\\ & R^2=0.52;\mathrm{F}={8.9}^{\ast \ast };n=14.\end{array}$$

Δ real GDP = the percentage increase in real GDP (2000–2007); Δ Hh Debt = the increase in household debt as a percentage of GDP (during 2000–2007). The equation was estimated for eleven Eurozone countries (Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, and Spain) plus Denmark, Sweden, and the UK. Robust t-values are reported in parentheses. *** and ** indicate statistical significance at the 1 percent and 5 percent levels, respectively. Without the dummy for Ireland, the regression result is:

$$\begin{array}{rl}\mathrm{\Delta }\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{l}\mathrm{G}\mathrm{D}\mathrm{P}& =10.30+0.38\mathrm{\Delta }\mathrm{H}\mathrm{h}\mathrm{D}\mathrm{e}\mathrm{b}\mathrm{t}\\ & {\left(3.96\right)}^{\ast \ast \ast }{\left(2.99\right)}^{\ast \ast }\\ & R^2=0.41;\mathrm{F}={9.0}^{\ast \ast };n=14.\end{array}$$

Figure 3 Higher Household Debt Is Associated with Higher Home Prices in the Eurozone

Sources: See sources for Table 1.

Notes: The regression line is based on the following OLS regression:

$$\begin{array}{rl}& \mathrm{\Delta }\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{l}\mathrm{hom}e\mathrm{p}\mathrm{r}\mathrm{i}\mathrm{c}\mathrm{e}=+1.44\mathrm{\Delta }\mathrm{H}\mathrm{h}\mathrm{D}\mathrm{e}\mathrm{b}\mathrm{t}\\ & (5.95{)}^{\ast \ast \ast }{R}^2=0.69;\mathrm{F}=35.4^{\ast \ast \ast };n=14.\end{array}$$

Δ Home Price = the percentage increase in the real house price (2001–7); Δ Hh Debt = the increase in household debt as a percentage of GDP (during 2001–7). See notes for Figure 2.

Figure 4 Higher Home Prices Are Correlated with Higher GDP Growth in the Eurozone

Sources: See sources for Table 1.

Notes: The regression line is based on the following OLS regression:

$$\begin{array}{rl}& \mathrm{\Delta }\mathrm{G}\mathrm{D}\mathrm{P}=13.70+0.14\mathrm{\Delta }\mathrm{r}\mathrm{e}\mathrm{a}\mathrm{l}\mathrm{h}\mathrm{o}\mathrm{m}\mathrm{e}\mathrm{p}\mathrm{r}\mathrm{i}\mathrm{c}\mathrm{e}\\ & {\left(7.12\right)}^{\ast \ast \ast }{\left(2.72\right)}^{\ast \ast }{R}^2=0.21;\mathrm{F}={7.4}^{\ast \ast \ast };n=14.\end{array}$$

Δ real GDP = the percentage increase in real GDP (2001–7); Δ real home price = the percentage increase in the real house price (2001–7). See notes for Figure 2.

TABLE 2 Debts (percent of GDP), 2012

	Households	Nonfinancial corporations	Financial corporations	Government	Total
Belgium	57	354	363	106	880
Germany	59	152	401	89	699
Ireland	113	444	1,856	128	2,540
Greece	71	117	238	166	592
Spain	88	228	281	93	690
France	68	226	363	109	766
Italy	51	182	234	142	610
Netherlands	139	245	1,018	83	1,485
Austria	55	197	295	86	632
Portugal	101	263	335	129	827
Finland	70	206	362	64	702
Eurozone-11 average	79	238	522	109	948
Denmark	149	203	624	59	1,035
Sweden	88	340	348	49	825
United Kingdom	99	240	1.192	102	1,633
Average (all countries)	86	242	565	100	994

Source: Authors’ calculations from Eurostat data (on financial balance sheets [nasa_f_bs]; http://appsso.eurostat.ec.europa.eu/nui/show.do).

Figure 5 Postcrisis GDP Growth (2009–2013) Is Not Correlated with Precrisis Changes in Unit Labor Costs (2000–2008)

Sources: Authors’ estimations based on Eurostat Data on nominal unit labor costs (http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tipslm20&plugin=1) and unemployment (http://ec.europa.eu/eurostat/tgm/table.do?tab=table&init=1&language=en&pcode=tipsun20&plugin=1).

Notes: The conclusion from the OLS regression analysis is that there is no statistically significant association between the (percentage) change in unit labor costs (2000–2008) and real GDP growth (2009–13). The results are sensitive to the outlier observations for Greece, Luxembourg, and even Italy and Spain; when we control for these “outliers” (using country dummies for the mentioned countries), the estimated coefficient of percentage of ULC change on real GDP growth is not significant (at 10 percent)

TABLE 3 Unit Labor Costs and Gross Output Prices (mid-2000s)

	Germany	Greece	Italy	Portugal	Spain
1. Intermediate input costs per unit of output	0.67	0.68	0.74	0.73	0.73
2. Unit labor costs: ULC	0.24	0.15	0.16	0.17	0.16
3. Total unit variable cost: vc = 1 + 2	0.91	0.83	0.90	0.90	0.89
4. Markup rate: π	0.10	0.21	0.11	0.11	0.12
5. Gross output price: (1 + π) * vc	1.00	1.00	1.00	1.00	1.00
6. Implied “pass-through” elasticity of a 1 percentage point decline in ULC	0.26	0.18	0.18	0.19	0.18

Sources: Storm and Naastepad (2015a, 2015b). Calculated using the OECD STAN Database input–output tables.

Notes: Gross output price is the average for the manufacturing sectors (C15T16–C36T37). Net indirect taxes have been included in intermediate input costs. The implied “pass-through” elasticity measures the decline in the gross output price (in percentage points) caused by a 1 percentage point decline in ULC.

Figure 6 Does higher unit labour cost lead to higher unemployment?” (a) Changes in ULC (2001–2009) and in the unemployment rate (2009–13) [reproduced from Informal European Council (2015)]. (b) Changes in ULC (2009–13) and in the unemployment rate (2009–13) [reproduced from Janssen (2015)].

Sources: See sources for Figure 5.

Figure 7 Postcrisis Eurozone (2009–2013): Internal Devaluations Are Killing Economic Growth

Sources: See sources for Figure 5.

Notes: The OLS regression is:

$$\begin{array}{rl}& \mathrm{\Delta }\mathrm{G}\mathrm{D}\mathrm{P}=-3.10+0.51\mathrm{\Delta }\mathrm{U}\mathrm{L}\mathrm{C}-17.78\mathrm{D}\mathrm{u}\mathrm{m}\mathrm{m}\mathrm{y}\mathrm{f}\mathrm{o}\mathrm{r}\mathrm{G}\mathrm{r}\mathrm{e}\mathrm{e}\mathrm{c}\mathrm{e}\\ & {\left(-3.04\right)}^{\ast \ast \ast }{\left(3.34\right)}^{\ast \ast \ast }{\left(-8.73\right)}^{\ast \ast \ast }{R}^2=0.80;\mathrm{n}=15.\end{array}$$

Δ real GDP = the percentage increase in real GDP (2009–3); Δ ULC = the percentage increase in average nominal unit labor costs (2009–13). See notes for Figure 2. The regression result for the twelve Eurozone countries is:

$$\begin{array}{rl}& \mathrm{\Delta }\mathrm{G}\mathrm{D}\mathrm{P}=-3.69+0.53\mathrm{\Delta }\mathrm{U}\mathrm{L}\mathrm{C}-17.05\mathrm{D}\mathrm{u}\mathrm{m}\mathrm{m}\mathrm{y}\mathrm{f}\mathrm{o}\mathrm{r}\mathrm{G}\mathrm{r}\mathrm{e}\mathrm{e}\mathrm{c}\mathrm{e}\\ & {\left(-3.65\right)}^{\ast \ast \ast }{\left(3.16\right)}^{\ast \ast }{\left(-8.69\right)}^{\ast \ast \ast }{R}^2=0.84;n=12.\end{array}$$

TABLE 4 Value-Added Share (Relative to Germany’s), 1999 and 2007 (Percentage Differences)

	Manufacturing and market services						Construction
	High and medium-high technology		Medium technology		Medium-low and low technology
	1999	2007	1999	2007	1999	2007	1999	2007
France	–3.5	–9.6	–0.5	0.4	1.2	1.3	–0.4	2.3
Greece	–12.9	–14.9	–8.6	–8.3	3.5	3.6	1.6	2.5
Italy	–4.0	–7.8	–2.2	–1.8	4.0	4.3	–0.5	2.1
Portugal	–7.1	–11.2	–2.1	–0.7	5.9	6.7	1.9	2.8
Spain	–5.4	–11.4	–4.9	–3.4	2.4	0.9	2.4	7.9
EU25	–3.2	–5.7	–1.3	–0.1	2.8	2.7	0.1	2.4
Memo:
Germany	24.9	27.3	21.4	21.0	19.9	19.0	5.5	4.0

Sources: Storm and Naastepad (2015c). Data are from OECD STAN Database.

TABLE 5 Eurozone: Real Interest Rates and Domestic Demand Growth (1992–1999 and 2000–2007)

	Average real interest rate		Average annual rate of domestic demand growth
	1992–1999	2000–2007	1992–1999	2000–2007
France	5.14	2.31	1.71	2.16
Germany	4.11	3.44	1.32	0.38
Greece	5.85	1.44	2.63	4.45
Italy	5.36	2.07	1.11	1.36
Portugal	3.55	1.42	3.57	0.96
Spain	4.43	0.41	2.72	4.28
Eurozone	n.a.	1.97	2.56	1.82

Source: Storm and Naastepad (2015c).

TABLE 6 Real Gross Fixed Capital Formation and Rates of Return on Capital: Germany, Italy, and Spain (1992–1999 Versus 2000–2007)

Real gross fixed capital formation (% of GDP)
	Germany		Italy		Spain
	1992–1999	2000–2007	1992–1999	2000–2007	1992–1999	2000–2007
Machinery and equipment	10.1	13.2	10.7	15.2	8.7	13.8
of which: ICT capital	3.1	6.3	2.2	5.3	2.7	6.0
Construction	14.3	11.0	11.1	11.3	15.7	18.5
of which: residential	8.1	6.3	5.2	4.9	6.3	8.9
nonresidential	6.2	4.6	5.9	6.4	9.4	9.6
Total fixed investment	24.5	24.2	21.9	26.5	24.4	32.3
Industry-specific rates of return on capital (%)
Total manufacturing	6.9	11.0	7.5	6.0	13.5	13.0
Construction	28.8	17.9	22.2	18.4	23.7	34.2
Wholesale and retail trade	9.6	10.6	21.6	12.3	16.7	15.5
Hotels and restaurants	–17.0	–6.0	7.6	9.1	25.2	31.9
Transport, storage, and communications	2.8	5.5	3.8	6.3	10.4	9.4
Finance, insurance, and real estate	7.7	6.2	8.3	8.8	6.8	10.5

Sources: Storm and Naastepad (2015c). Authors’ calculations from EU-KLEMS Database.