With speculation mounting that Greece may turn to the IMF rather than its eurozone “partners” for a bailout (still an unlikely outcome, I reckon: Brussels will do what it can to keep this mess in-house), attention is now concentrated on what’s going on in Athens, but Greece’s difficulties need to be kept in some sort of proportion. The country only accounts for 2 or 3 percent of EU GDP. The real danger posed by a Greek collapse is not so much the devastation it would cause within Greece (terrible though that would be for the Greeks) as the potential knock-on effects elsewhere.

Two other vulnerable eurozone countries, Spain and Italy, however, are far larger economies. Meltdowns there would be catastrophes in their own right, which is why Michael Dicks’ piece in Tuesday’s FT was such a timely read.

What made the article particularly interesting was its author’s focus on the way that the introduction of the euro (without any of the industrial restructuring that was meant to accompany it) has crippled the ability of some of the eurozone’s weaker brethren to compete against Germany. Debt is only part of the problem:

. . . competitiveness is actually the key issue. Although everyone is focusing on raising taxes and cutting spending, to stop the haemorrhaging of public finances, what really matters is competitiveness. After all, if you lose that – say because your productivity falls or your wages rise – you will diminish your source of foreign revenues. Taking a look at the numbers, it is apparent that the Greek problems are by no means unique, or indeed as bad as some other eurozone countries. According to OECD estimates, back in 1995 – when Germany’s relative unit labour costs (or “RULCs”) peaked – Greece’s were roughly on a par. By 2009, however, Greece’s were 17 per cent higher. Hardly surprisingly then, that this shift has been accompanied by Greece losing export market share in nine of the past ten years.
OECD data suggest both Italy and Spain have much bigger competitiveness problems. Since 1995, Spain’s RULCs have risen by nearly 30 per cent. And Italy’s are up by a humungous three quarters. Back in 1995, Italian manufacturers benefited from having labour costs per unit of output that were only 60 per cent of Germany’s. Now Italy’s RULCs are 30 per cent higher than Germany’s. As a check on whether this matters, take a look at German export volumes and compare them to Italy’s. After the millennium, the former rose pre-crisis by about 70 per cent, and look set to return to that level again next year. Italy’s, by contrast, rose by just shy of 20 per cent pre-crisis, and do not look set to get back to their old peak this side of 2013, if even then. Indeed comparing Italy’s public debt to its exports, instead of to its GDP gives a debt-to-“income” ratio of roughly 4. This is not just a big number, but is more or less spot on what Ken Rogoff and Carmen Reinhart have identified as being a key “tipping point” for identifying when crises occur.