Et Tu, Wolfgang?
Perhaps the most startling and frustrating thing about the debate over the fate of the euro is the way almost everyone avoids confronting the core issue — the elephant in the euro. With a unified currency, adjustment to differential shocks requires adjustments in relative wages — and because the nations of the European periphery have gone from boom to bust, their adjustment must be downward. At this point, wages in Greece/Spain/Portugal/Latvia/Estonia etc. need to fall something like 20-30 percent relative to wages in Germany. Let me repeat that:
WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.
But nobody is willing to say that outright. Even the ever-pessimistic (and hence realistic) Wolfgang Munchau writes
None of the governance reform proposals that are currently discussed even attempt to answer the questions of how Spain is going to get out of this hole, and how the competitiveness gap between the north and the south of the eurozone is going to be closed … What the eurozone needs is an increase in domestic consumption in the north, particularly in Germany, and labour and product market reforms in the south, most importantly in Spain.
How many readers will get that what he’s really saying is that
WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.
How hard will it be to achieve this? Look at Latvia, which has pursued incredibly draconian austerity. Unemployment has risen from 6 percent before the crisis to 22.3 percent now — and wages are, indeed, falling. But even in Latvia labor costs have fallen only 5.4 percent from their peak; so it will take years of suffering to restore competitiveness.
The official answer is that this just shows the need for more flexible labor markets. But this was a subject we all batted back and forth in the initial debate about the euro, circa 1990: nobody has labor markets that flexible.
If the euro isn’t workable without highly flexible nominal wages, well, it isn’t workable.
Anyway, this is my morning euro rant.
Ignoring The Elephant In the Euro
When the idea of the euro was first broached, there was extensive debate about whether Europe constituted an “optimum currency area”; the key question was whether European nations would have an adequate way to adjust to “asymmetric shocks”, which left some economies more depressed than others. When countries have their own currencies, they can deal with such shocks, at least in part, by devaluing — an argument made most eloquently by none other than Milton Friedman (pdf). Lacking that alternative, something else is needed.
So now we have a euro crisis, which — to me at least — hinges crucially on that very issue. What makes Greek problems so intractable is the fact that there’s little hope for growth for years to come, because Greek costs and prices are out of line and will need years of painful deflation to get back in line. Spain wouldn’t be in trouble at all if it weren’t for the fact that the bubble years left its costs too high, again requiring years of painful deflation.
Yet if you look at many discussions of the euro crisis, they simply ignore the adjustment issue. Not to especially bash Marco Pagano, but how can you write a whole essay on the euro’s troubles without so much as mentioning the problem of getting relative costs and prices in line?
It’s tempting to psychoanalyze here — to note that if you pretend that it’s all about fiscal profligacy, the problem seems solvable with a bit more discipline, but if you admit that the original optimum currency area issues are key to the situation, you wonder whether the common currency really makes sense.
But whatever the reason, it’s stunning to see so many smart people pretending not to notice the elephant in the room.
No comments:
Post a Comment