Friday, 2 April 2010

Devaluing Portugal, Spain and Greece's currency.

One problem with pig countries is poor export performance (although some dispute this). A solution would be a substantial pay cut for all their employees, which equals a devaluation of their currencies. However there is a problem, namely that wages are “sticky downwards”, as Keynes put it.

A solution might be to reduce or abolish any payroll taxes in these countries (and/or implement a general subsidy of all employees) and funded by increased personal taxation. That would come to the same thing as the above “pay cut / devaluation”: the cost of goods produced in these countries for non pig country customers would decline.

Reducing pay by 1p an hour can lead to riots. In contrast a slow reduction (or slower increase) in living standards caused by income tax increases does not normally lead to civil unrest.

But the above idea is something of a “last resort”: clearly a country cannot go on increasing employment subsidies and personal tax for ever to counteract a failure to control wage increases.

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