Saturday, 25 January 2014

Mark Weisbrot is clueless on Greece.

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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