Saturday, September 15, 2012

Maximum Wages and Minimal Prospects

This week Ray Dalio of Bridgewater, the world's largest hedge fund, talked of a "lost decade" for the economies of Southern Europe.

This dovetails with a piece published last week by Deutsche Bank (h/t Zerohedge) on "Why the PIGS are Out of Luck." Says Zerohedge:

There are three key factors to modeling trade flows - or relevance - in a post-globalization world. While competitiveness is important, countries gain from being generally 'Technology-rich', 'Labor-rich', and/or 'Resource-rich'.

Analysis of Global Competitive Advantages

Among those in the "no particular advantage" category: The PIGS: Portugal, Italy, Greece, and Spain.

Normally in times of collapse, we think of countries becoming havens of cheap labor (which helps their recovery). But because of the PIGS's harsh union laws and pools of regulatory quicksand, Portugal, Italy, Greece, and Spain cannot become competitive with a LABOR RICH country like Vietnam without a marked adjustment of their labor laws; actually, of their entire societies. That is likely to take years (if it happens at all), so the process whereby the PIGSs become competitive relative to Vietnam probably isn't even a medium term prospect.
Also, a country like Greece has little manufacturing. The infrastructure and labor force with the appropriate skills to manufacture is already in place in Vietnam, where the labor is much cheaper. Which country would you choose?

A standard way of becoming more competitive is to devalue your currency. As long as the PIGSs remain velcroed to the euro, they will be stuck with a strongish currency (at least relative to a hypothetical lira or peseta) which combined with their labor laws and regulation will keep them extremely uncompetitive.

The old argument in favor of countries like Italy or Spain was that they were more stable than the emerging world, as they had the "rule of law" (kind of). Now that that too seems to be breaking down, exactly what do those countries have to offer?

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