That’s the
title of a letter in this morning’s Financial Times by twenty delusional
economics professors who think they have the solution Eurozone problems.
They give us
a tearjerking description of austerity in the periphery. And that’s a good
gambit because 95% of the population think that when their emotions are
aroused, what they are reading must be of significance.
The
professors then end up by telling us that the solution is “a plan to revitalise
public and private investment . . . and increase employment in the peripheral
countries of the union..”.
Well that
sounds great doesn’t it? Who could possibly be against a “plan to increase
employment”? Unfortunately it’s just happy
talk: no doubt the average left of centre dummy will be enthralled by the
phrase “revitalising public and private investment”. But the professors don’t
actually explain on their site how that would work. Attention to detail and
reality has never been the left’s strong point.
An introductory
lesson on devaluation.
The
professors also show an abysmal failure to understand how internal devaluation
works in a common currency area. So and introductory lesson on the subject for
professors who haven’t the faintest grasp of the subject is required. Here goes.
The
professors say that “Expecting the peripheral countries of Union to solve the
problem unaided means requiring them to undergo a drop in wages and prices on
such a scale as to cause a still more accentuated collapse of incomes and
violent debt deflation…”
Wrong.
Devaluation
(whether its internal devaluation of a country in a common currency area or the
devaluation of the currency of a country that issues its own currency) does not
require a big drop in REAL WAGES. To illustrate, the Pound Sterling was devalued
by about 25% in 2008, and the majority of the UK population didn’t know it had
happened: the effect on real wages was minimal.
Likewise if
wages and prices in a periphery country drop by say 25%, the effect on REAL
WAGES is small because local wages are themselves a large constituent of the
cost of most goods and services sold in the relevant country.
These
professors have past form.
Three of the
professors have a record of talking nonsense. They are Dani Rodrick, Jan Kregel
and Dimitri Papadimitriou.
Conclusion.
The Eurozone’s
problems are simply problems that are INHERENT to a common currency area, and
there are no easy solutions. Solution No.1 is the current austerity/slow
internal devaluation solution. Solution No.2 is to leave the Euro.
If I was economic
dictator of the EZ I could impose a very quick and relatively painless
solution. That is to organise an overnight internal devaluation for the
periphery: i.e. FORCE THRU a 25% or so cut in wage and prices in the periphery.
That would be administratively difficult and expensive to do, but the costs
would be less than the existing costs of austerity in the periphery.
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