In an article
entitled “Greece: signs of growth come as austerity eases” Mark Weisbrot
provides Guardian readers with the emotional thrill they buy the Guardian for:
a bit of weeping and wailing about the poor. In this case obviously it’s the
poor in Greece and the rest of the Euro periphery.
Unfortunately when it comes to solutions,
Weisbrot isn't too clued up. His last sentence naively claims “…the eurozone is
still stuck near record levels of unemployment (12.1%), and how soon it returns
to normal will depend on how quickly the European authorities are willing to
reverse their policies for the region.”
Er… no: that won’t work. The problem (which
Weisebrot alludes to but doesn’t fully grasp) is competitiveness disparities as
between different Euro countries. That problem (lack of competitiveness) is
easily dealt with when you have your own currency (although even that is not a
100% guaranteed to work). But when you’re uncompetitive and share a currency
with other countries, there’s BIG BIG problem. And that is that you can still
devalue. But devaluation has to come in the form of “internal devaluation”, (which
Wisebrot also mentions). In fact Weisebrot is so near “getting it” that it’s
surprising he doesn’t.
Now internal devaluation consists of cutting
wages and prices. And that doesn’t GREATLY affect living standards in the
relevant country, any more than conventional devaluation affects living
standards in the relevant country: the UK devalued the pound by 25% in 2008,
and very few UK citizens even knew it had happened.
In addition, the country trying to do an
internal devaluation can try cutting other costs, like cutting bureaucratic
waste, which is certainly a problem in Greece. But the latter form of cost
cutting isn't essential for internal devaluation to work.
But the BIG PROBLEM is (as Keynes rightly
pointed out) is that wages are sticky downwards. I.e. cutting wages and prices
is difficult. But it’s got to be done.
So… contrary to Weisbrot’s suggestion, simply
“reversing policies” doesn’t solve the problem. That is, if there’s a
significant boost to demand in Greece, inflation will likely rise or wage and
price falls will cease: the exact opposite of what’s needed to implement
internal devaluation.
So what’s the solution? One solution is long
term subsidies of periphery countries by core countries (primarily Germany). And
just ain’t going to happen. German taxpayers, understandably, aren’t too keen
on that.
Another solution: do what the UK does, namely
have your own currency. But quitting the Euro and re-instating your own
currency is a wrench. In short, there just aren’t any easy or quick solutions.
And finally…. Mark Weisbrot is co-director of
the Centre of Economic Policy and Research (Washington DC). Another co-director
is Dean Baker who is a genius. I follow his blog and very rarely disagree with
him.
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