A Greek warning from down-and-out Detroit

Permanent decline is not inevitable for Detroit or Greece. But uncanny parallels between them show economies without effective policy instruments are not self-stabilising.

FT.com

While spending part of my summer break away from the eurozone in downtown Detroit, I came across an old article by the Chilean-born writer and photographer Camilo JosĂ© Vergara. In the mid-1990s he made what he called “an immodest proposal”: to turn a dozen city blocks of derelict pre-Depression skyscrapers into an “American Acropolis”.

Most Detroiters hated, and rejected, his idea for a “skyscraper ruins park” – although, looking at the sheer scale of dereliction today, one wonders whether it has ultimately prevailed. I have never seen a city so empty. About 40 per cent of its area is unoccupied, much of it covered in ruins.

For me, however, the interesting question is not so much whether Detroit should have emulated ancient Greece, but whether modern Greece will end up where Detroit is today. Could the indebted nation, too, face non-reversible long-term economic decline?

I am aware of the differences between the economics of a city and that of a country. But there are uncanny parallels – especially if the country is a member of a monetary union with the institutional design of the eurozone.

The first is, obviously, that both Detroit and Greece have defaulted on their debt. Greece has restructured some of its debts. Detroit has filed for Chapter 9 municipal bankruptcy protection.

Second, neither Greece nor Detroit benefited on a sufficient scale from financial transfers. Greece receives structural funds from the budget of the EU and loans to stretch its debt repayments. In Detroit, economic functions such as unemployment insurance and education are supported by the state and federal governments. But these transfers have not been nearly sufficient to reverse its decline. When companies and citizens leave, the city loses irreplaceable tax revenues.

Third, emigration had a huge effect on the decline. American economists frequently point out that migration flows constitute a natural stabiliser in the US; if a region is hit by unemployment, people pack up and seek their fortune elsewhere. That is beginning to happen in the eurozone too. In Ireland, emigration flows are at the highest level since the 1980s.

But if the talented people leave – which, in Ireland and Greece, they are doing – the chances of a return to growth diminish, especially in the absence of any form of stimulus. The permanent decline of a city such as Detroit is the price you pay for labour mobility. The middle classes there mostly left for nearby suburban areas, such as Oakland County in the north, one of the richest in the US. The population of Detroit has declined from a peak of 1.8m in 1950 to 700,000 in 2012.

Fourth, falling wages do not bring back equilibrium. As unionised jobs disappeared from Detroit, wages fell; yet unemployment remains extremely high. Unemployment peaked at 27.8 per cent in 2009 - virtually the same as in Greece today. Unemployment in Detroit has fallen since but, at 18.6 per cent in June, remains far higher than the national average.

Fifth, in both cases the optimists have kept on forecasting that the recovery is around the corner. In Detroit, optimism usually correlates with the performance of the Detroit Tigersbaseball team. In Greece, it usually rests on some anecdotal story. One of my interlocutors recently witnessed the opening of a new shop in Athens, and drew wild conclusions about an incipient recovery. Official forecasts by the European Commission regularly, and wrongly, show that an upturn is just around the corner. The example of Detroit shows that economies without effective policy instruments are not self-stabilising.

Permanent decline is still not inevitable, neither for Detroit nor for Greece. The US city’s house prices are so low that people are moving back to start businesses there, at least in the relatively safe areas. A few large companies have been investing in downtown Detroit, and there is also a vibrant arts scene in the inner-city areas. With the right set of incentives, the demolition of ruins and a crackdown on crime, Detroit might yet prosper again after 40 years of decline, albeit at a permanently lower level.

In Greece, the eurozone may yet accept a total debt write-off, and shift some investment into the country. If everything that went wrong in the past four years now turns right, it is conceivable that the Greek economy will resume growth after six years of recession . I do not think this will happen, but at least it is theoretically possible. Unlike Detroit, Greece also has the option of leaving the monetary union and adopting its own currency. But it is far from clear whether Athens would opt to do that – even if it were in the country’s best economic interests – since political factors may prevail.

Of course, Greece has already experienced decline. The Acropolis is probably the most potent example of the long-term political decline of a powerful city-state. The ruins of Detroit symbolise the decline of a modern industrial city. There is no reason to think that it could not happen elsewhere – even to a modern sovereign nation state – when the conditions are what they are.

Copyright The Financial Times Limited 2013.

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