Wednesday, 18 February 2015
EZ periphery reform.
There’s been much excitement about the chart below, which seems to indicate that Greece has done lots of reform. E.g. see here and here. Yet Greece and other PIGS still have problems. And that allegedly proves, at least according to some, that all those demands for reform are nonsense, so austerity in the periphery should be abandoned immediately.
Well, not so quick. First, the above chart doesn’t actually tell us HOW MUCH reform Greece and others have done. That is, could be that the amount of reform done by Greece is small, and the amount done by other countries is almost negligible. Indeed, if there’s been a big cut in tax evasion in Greece in recent years, that’s news to me.
The basic problem is that PIGS are uncompetitive relative to Germany etc. That is, PIG costs (in terms of Euros) are too high.
Now the word “reform” normally refers to sorting out problems like Greece’s notoriously inefficient tax collection system and its bloated and inefficient bureaucracy. And dealing with those problems would certainly help. However, no one ever suggested far as I know that “reforms” will TOTALLY solve the problem. That is, it’s widely accepted that internal devaluation in at least some PIG countries is needed as well.
That is, when a country with its own currency becomes uncompetitive, it can deal with that via conventional devaluation. But in a common currency area, that’s not possible, so internal devaluation is the only option. And unfortunately internal devaluation requires years of excess unemployment, i.e. “austerity”. Possibly the AMOUNT OF austerity could be reduced a bit, as suggested by Simon Wren-Lewis. But there’s no getting away from years of austerity.
Of course that’s daft. But that’s common currencies for you.
P.S. (Same day)
There’s more of the above sort of delusional thinking here by Dean Baker (who I nearly always agree with). He seems to think that all we need is stimulus in the periphery and everything will be fine. He doesn’t mention, and is thus presumably unaware of the fact that stimulus will suck imports into periphery countries which pushes them further into debt. Of course if Dean Baker is offering to lend his life savings to Greece, I’d have a SMALL amount of sympathy with his views. But he’s not.