Tuesday, November 30, 2010

Ci siamo anche noi!

Italians must have been wondering why bond markets took so long to worry about a large Eurozone country with a 100% + debt to GDP ratio, massive structural problems, and a Prime Minister accused of misdemeanors ranging from false accounting all the way through to child sex abuse.

Anyway, now here we are. Italian bond yields are starting to jump just like Spain's. So, at the moment we have Ireland, Greece, Portugal, Spain and Italy all in trouble, with just a hint of Belgium. Meanwhile Sweden (albeit outside the euro) had the highest economic growth on record last quarter. I wonder what the default risk countries might have in common?

Amongst other things, they all were running current account deficits, and all had high inequality in the mid-2000s. There are a bunch of possible explanations for this relationship (which is pretty strong, and not a quirk of the data or a historical accident), including one which relates equality and trade to strong unions, wage compression and high skill levels.

Anyway, whatever the explanation, it pretty much nails the idea - articulated by Arthur Okun and reproduced in any number of Economist editorials - that inequality is the price to be paid for economic efficiency.