Italy or Greece?

I have said in previous posts that the problem with the euro is not what happens to Greece in this particlar crisis, it’s what happens in the next one and the one after that. The issue is competitiveness, and how other economies are doing relative to the largest, and most efficient, Germany. Because if the Olive belt countries don’t improve competitiveness to near German levels their exports will decline and they will not be able to service their debts and pay their welfare.

In an interesting article in the FT Mike Dicks wonders if Italy, rather than Greece, isn’t the problem, and gives us the numbers.

In 1995 Italy benefited from cheap labour. Labour costs per unit of output were only 60% of Germany’s. Now they are 30% higher (Greece’s are only 17% higher). So it is not surprising that since the formation of the euro (ie since the weaker countries have been unable to devalue) Germany’s exports have increased by 70% whereas Italy’s increased by only 20% until the crisis and won’t get back to those levels until 2013.

In other words, the problem is getting worse; and something has to give.