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Economic Hardship in modern Europe: Why the South? By Maxim Stolyarov

by on August 10, 2012

We often about the financial troubles engulfing the southern nations of Europe: first Greece, then Portugal, Spain and Italy.  By comparison the Northern countries – Germany, Austria, France, the Benelux – are doing relatively well. People often claim that it is the Southern ‘laziness’ that is to blame, that financial trouble is all Greeks’ own fault “since they do not try hard enough preferring instead to live in credit or of benefits”. This is, of course, seriously flawed logic. But why is it that the South grows increasingly impoverished while the North prospers?

There are three major factors, one geographical and two historical.

The clearest difference between the North and the South is the unavailability of river transport in the South, whereas the northern countries enjoy the ease of transporting goods via multiple waterways. River transport is roughly 10 to 30 times cheaper than transportation via land, because of the cheaper infrastructure (no road maintenance) and the decreased cost of fuels. It may be counter-argued that Italy, Greece, Portugal and Spain have plenty of sea routes to transport goods. Unluckily, the same logic does not apply to seas for several reasons. Firstly, rivers serve double the area that seas do due to having two shores. Secondly, due to tidal activity as well as storms, the infrastructure needed to transport goods by sea is considerably more costly. The availability of cheap waterways gives the North a comparative industrial advantage, lowering down the costs of production and making exports cheaper. In mere geographical terms, France or Germany are better suited for industrial expansion than Italy or Spain.

Then comes the historical factor of the strategic importance of the North during the Cold War. Rebuilding German, French, British and Benelux economies was one of the primary tasks of the Marshall plan, so that Europe was able to hold on its own against the USSR and associated states in a potential conflict. Of course, Spain, Italy and Greece were not left out either. However their minor role in the Second World War suggested their lesser strategic significance. This meant that the rebuilding of their economies was never paid as much attention as rebuilding those of the Northern countries.

This brings us to the third point. The South has traditionally attempted to offset the higher transportation costs by devaluing their respective currencies. Any attempts to do otherwise meant a financial disaster: Primo de Rivera and Mussolini brought their countries to the edge of a financial collapse simply by revaluating the respective currencies of Spain and Italy. The introduction of the Euro has denied such an advantage of devalued currencies to the Southern nations, crippling their economies.

Furthermore, the unification of the EU into a single trading block has tempted the South to live on Northern goods purchased with Northern credit. This was because of the fierce competition between Northern and Southern companies, in which lower transportation costs (the geographical factor) and bigger initial investments (the historic factor) ensured that the Northern companies would win out. This further improved the position of the North, while impoverishing the South. In the long term, however, nobody benefited: the North now has to repay the debt the South has accumulated, which is, of course, painful for both.

However, if the South is doomed – not because of its laziness, but due to a combination of geographical and historical factors – to slower economic expansion, why can’t the North simply dump the South? In the end, will not forcing the South out of the Eurozone allow it to float currencies hence alleviating economic hardship? Leaving moral factors aside, we shall understand that cutting out the South now will do irreparable economic damage to the North. Should the North dump the South, Northern currencies will immediately become overvalued despite any interventions by central banks. Hence, export industries will be damaged, defying the Northern economic model. Whatever options the North may be weighing up, cutting out the struggling South is not a reasonable one. And no, the Greeks are not lazy.

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From → Foreign Affairs

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