Is Booze Causing Europe’s Economic Woes?
It’s a long known economic joke that the only recession proof investment is alcohol — no matter what happens, consumption never seems to lag. Oddly, the opposite is holding true for European liquor outfits, which have had to cut hundreds of thousands of jobs because of declining demand and increasing prices.
That’s right, Europe is experiencing beer stagflation, the rare combination of economic conditions where prices go up despite decreasing quantity sold, much like oil in the 1970s.
The New York Times reports that “Europeans are saving money by drinking at home rather than in pubs, which is costing jobs in the hospitality industry and depressing tax revenue.” They cite an exhaustive report by the trade group Brewers of Europe, which puts the total job losses at 8% of the industry, or 260,000 workers. This is wildly disproportionate to the rest of the European economy, which has only seen a 2% rise in unemployment.
There are two primary reasons why the alcohol industry has been disproportionately affected. First, as noted above, consumers are tired of high prices at bars. Second, the Times explains, “some of the decline is due to steep increases in the value-added tax imposed on beer by some countries, including Greece.” The VAT therefore leads to higher prices, much like a traditional supply shock.
These findings also explain some of the recent rumblings from tourists and beer enthusiasts alike at the 2011 installment of Oktoberfest. Beer prices have been inflating at 1.3 percentage points above the Eurozone average, leading to record prices, which are topping out at 12.25/liter. It looks like this is pure stagflation — consumers are seeing higher prices, but producers are having to cut back production and everybody loses.
Even though this is a lot of bad economic news, here’s to hoping that the EU countries try to head this crisis off with a little bit of pro-consumer stimulus.
Photo credit: whatleydude's Flickr stream.