Lessons from Europe's Winners and Losers

In a winner-take-all world, you make a good living by being best at something, or a poor living by producing generic products cheaply. South Korea has chosen the first route to success. No people are more driven to excel. The national obsession with Olympic success and the wild enthusiasm for such athletes as figure-skater Kim Yu-na parallel Korean ascendance in such key niches as smart phones. There are enough things to be best in the world so that every country has a shot at being best at something. But you have to want to be the best. I'm not a Hispanophobe. Spain had the best poet of the 20th century (Federico Garcia Lorca) and, arguably, the best classical musician (Pablo Casals). But the sad fact is that if Spain fell into the Atlantic tomorrow, the world economy wouldn't miss it.

There is another way to compete, and that is by producing mediocre products very cheaply. The trouble is that the feckless Greeks, Spaniards, and Italians used the euro system to borrow money to pay themselves more than they are worth. Notice that unit labor costs since 2000 are virtually unchanged in Germany. The German labor law reforms undertaken by the previous Social-Democratic government of Gerhard Schroeder reduced union power and eliminated incentives for Germans to stay on welfare indefinitely. Wages were restrained while productivity grew. Greek unit labor costs rose by nearly 40% during the same period, and by 30% in Italy and Spain. Wages cuts by those amounts would give Greece, Italy, and Spain a shot at competing with the Germans. But that's a hard argument to sell.

Don't believe the reports that a new Lehman-style financial crash is in the offing. What's going to happen is much less dramatic. In 2008 no-one knew how to value Wall Street's liabilities (for example, AIG's famous guarantees on subprime securities). Now the full extent of the problem is known to everyone. It's just a negotiation now over who gets knackered. And the answer, by one means or another, is the southern Europeans.