Euro crisis: Wages in the periphery need to fall 20-30% relative to Germany.

Paul Krugman isn’t pulling any punches


How hard will it be to achieve this? Look at Latvia, which has pursued incredibly draconian austerity. Unemployment has risen from 6 percent before the crisis to 22.3 percent now — and wages are, indeed, falling. But even in Latvia labor costs have fallen only 5.4 percent from their peak; so it will take years of suffering to restore competitiveness.

The official answer is that this just shows the need for more flexible labor markets. But this was a subject we all batted back and forth in the initial debate about the euro, circa 1990: nobody has labor markets that flexible. If the euro isn’t workable without highly flexible nominal wages, well, it isn’t workable.

Neither is David McWilliams

The Greek crisis isn’t the real thing. It is just a warning sign of what is to come. In geological terms – given that we are all volcanic dust experts now – Greece is the smaller volcano whose eruption is the warm-up act for the really big one.

He suggests we learn from history

However, experience going back to the 19th century indicates that, after a huge credit bubble, the choice is simple: either you can save the currency or save the economy, but you can’t save both.

If European governments want to keep the currency, they must impose austerity on their countries in order to squeeze more out of the budgets to pay the debts that their countries and peoples incurred in the boom. They transfer the debts of the private sector to the state, or vice versa, with guarantees and backstops. So the marginal euro in tax revenue goes to pay the rotten legacy of history, rather than to build the foundation for the future.

What European governments don’t seem to understand is that you can’t have a weak economy with a strong currency. The only way you can sustain that is by borrowing even more now to plug holes, which is precisely what the EU is doing.

And the killer –

If we keep going this way, Ireland will end up with a huge EU-subsidised public sector, a small but highly productive multinational exporting sector and hardly any domestic small businesses in the middle. Is that what we want?

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  • King Rollo

    Perhaps, in the light of Germany’s ban on short selling and the collapse of the Euro and GBP gainst the USD everybody should read this;

  • Mack

    Jim Rogers on the Keiser Report today was also good –!

    (About 13 mins in or so).

    They’ve banned naked short selling of bonds and some bank stocks – presumably it will still be possible (but more difficult) to short sell them. Is it crime to naked short sell in Germany and not be able to cover the asset sold? The Icelanders are charging some of their bankers with fraud (on the basis that they wouldn’t be able to cover) – see Keiser report vid above..

  • Mack

    There is an interesting review in the London Review of Books, in which J Stiglitz deals with the mistake in believing low wages benefit economies by driving down unemployment. Indeed he argues the opposite and points to those economies which have higher wages and better protection for Labour and who have come through far better these periodic inbuilt economic crises which are inherent within capitalism.

    Worth a read.

  • Mack

    Thanks Mick – I’ll take a read of that.

    There’s a trade off between high comparative wages in terms of the effect they have. Higher wages raise domestic demand but damage the ability to export.

    As wages rise, domestic demand rises but the competitiveness of a countries exports declines. Krugman and Stiglitz are mostly from the same stable (i.e. US Liberal Keynesians). They’re both in favour of propping up domestic demand by deficit spending – but that particular approach requires the ability to print money if the market is reluctant to fund it at reasonable interest rates. And the ability to devalue the currency to restore international competitiveness is essential.

    Keynes was way out on his own at the time in arguing for this (during the great depression most countries where on the Gold standard – so printing money was impossible and devaluations akin to a default). The problem is within the Eurozone this approach isn’t feasible unless backed by the ECB – but it’s only some countries that need it (the PIIGS), it would cause serious problems for Germany. Another US Keynesian Liberal James Galbraith says pretty much the same thing in a debate with Peter Schiff here –

  • Mack

    And it simply isn’t possible to restore competitivenes vis-a-vis Germany without adjusting relative wage levels (either raising German wages, or reducing wages in the uncompetitive countries) within a currency union.

  • glencoppagagh

    “If we keep going this way, Ireland will end up with a huge EU-subsidised public sector…”

    I’m at a loss to understand how McWilliams arrives at this conclusion. Anyone care to elucidate?

  • Drumlin Rock

    So reading this we should be extremely grateful that the UK did not join the Euro? So far the drop in Sterling seems to be the one thing that keeps the UK just above the PIIGS, I guess it can also be a risk, and is fueling inflation atm. but it is going to be sometime before it is a live issue in Westminister again.

  • Mack

    Fair comment. Plus PUIIGS doesn’t have the same ring.

  • Critical Alien

    In terms of the trilemma of economic globalization, political democracy, and the nation-state as mutually irreconcilable referenced by Pete Baker, and the 2002 article by Bernard Connolly in which he wrote:

    In Europe the advocates of monetary union have always been quite clear about the unpleasant financial implication of a single currency. For them, the crisis that will be created by the euro represents the route to establishing colonial administration in the smaller EMU countries.

    Should we suppose this thing will move the Eurozone economy as a whole toward a de facto German meta-administration? I don’t mean this in a tinfoil hat paranoia sense, but rather in terms of the money shoring the Euro up being German.

    Besides this, the Euro, if Wim Duisenberg was to be believed, was conceived of at least partly to prevent economic schisms between north and south Europe in times of economic woe. Is this a failure in principle, or thanks to shoddy practice? If the Euro was a political entity from the word go, its failures presumably indicate political failures. Economic decline on this basis is thus the fault of very real political figures and their (in)actions, not shadowy ‘economic forces’.

  • Suilven

    Hmmm, you don’t see any vested interest there whatsoever, KR?

  • slug

    Lack of competitiveness reducing the size of the private sector?

  • Neil

    One major problem appears to be that countries such as Greece no longer have the ability to devalue their own currency in order to shrink their debt. As I understand things this is why the previous govt and BoE were quite happy to allow sterling to do it’s own thing, as any drop in the value of stg meant a drop in the money to be repaid.

  • It seems to me the markets and their media gofers, the majority of whose economic expertise is bordering on nil, after hiding down their rat holes whilst the tax payer refunded their coffers, are now back to their old game of scare mongering to gain a short term economic advantage.

    Cameron was all for a Keynes solution when it suited his pals in the City, but now he is refusing to check them and acting as if the markets act rationally. Hence all this unfair cut cut cut, whilst neutering the state sector, but once again let private business to run riot in search of short term financial gain whilst the majority of the population gets only pain.

    I read an interesting piece about the Hong Kong government taking on the markets and winning during the last Asian recession when the money manipulating trash attempted to crash their currency. What mankind creates it can discipline or destroy, it must be clear to even the most illiterate dim wit as things stand, the markets are out of control.

    Unless the market is disciplined and dam quick, we will end up, looking back to the thirties as a prosperous decade, I ask you guys not to come on slugger wineing when the street explodes, for that is where this forelock tugging to the market is heading.

    On the bright side the public sector is well organised by the unions and jobs will not be lost without a rough hose struggle and rightly so.

    Only a barbarian would support putting people on the scrap heap, when no alternative work prospects exist. There is an alternative, it is called increased taxation, or have we all become so mean spirited and self centered, or dam stupid, we are not prepared to help one and another through a bad patch?

    Openness, equality and absolute fairness is the key to solving our current economic plight.

  • Glencoppagagh

    You mean huge relative to private sector as in NI? McW seems to mean huge in absolute terms but it’s the EU-subsidised bit that I can’t fathom at all.

  • Glencoppagagh

    “all this unfair cut cut cut”
    You’d almost be conned into thinking that tax revenues had shrunk.

  • Mack

    Well increasing taxes is just the opposite side of the same coin as spending cuts. It’s just that different people take the pain (and not neccessarily clear which people). If we raise taxes on business – they’ll hire less people. So would an able bodied worker on the dole, be better off with lower benefit levels but more jobs available? Or with higher benefits and less jobs?

    Keynesian economics still requires deficit reduction once the recession ends (Keynes argues countries should be running surpluses in good times and the private sector should be leading the investment). Cuts do provide a little more certainity (at least in a growing economy), increase income taxes and it becomes more economic for some people to duck out of the labour market (married mothers paying child care) and others find ways to avoid it (taxi-men not running the meter) etc.

    If the government doesn’t reduce the deficit (and any extra debt rung up) at some point, the danger is they’ll either be forced to monetise that debt or default. If they monetise the debt, it’s a skip, hop and a jump to hyperinfaltion (and probably blood on the streets one way or the other – this was the path to Adolf Hitler), if they default they could be shut out of debt markets and have to balance their budget anyway – but instantly. Ultra painful (again, unfortunately probably also riots and social unrest).

    Governments try to repel speculative attacks by hedge funds all the time. And hedge funds get it wrong, go bust all the time too. Hong Kong were able to repel the attack becauce they were in a strong position to do so. The Greeks lying about their finances, not taxing their rich and running up huge debts were in no position to do so. Their decline was inevitable. The biggest issue with hedge funds is when, like the investment banks just did – they take risks so large they threaten the entire system (a la Long Term Capital Management in 1998). This why we need strong regulation to ensure these disasters can’t happen again. But governments or companies living beyond their means are always going to have to face reality sometime..

  • Driftwood


    Why don’t you write to George Osborne about your fantasy solution? But why stop with just the economy, if we all learn to live in peace and harmony? Maybe you could buy the world a Coke, Mick?

  • Brian MacAodh

    ‘One in three Greeks work for the government and they enjoy higher wages and better benefits than their countrymen working in the private sector. The people who have been manning the barricades and rioting in Greece are not primarily the unemployed or under employed. To the contrary, they are the well and very securely employed and many are eligible to retire after 35 years of service at eighty percent of their highest salary after which they continue to be eligible for government paid health plans and other perks. The reality is that they are being paid with money their government doesn’t have and can no longer borrow. That is the real cause of the violent backlash to the bitter medicine the creditor nations are requiring of Greece and soon will be requiring of the other newly debt-burdened nations of Europe. It is also ironic that it is government employees who are rioting against the government they serve, in opposition to the consequences of the policies they themselves put in place.

  • slug

    I think he is thinking in terms of fiscal transfers, ultimately.

  • “If we raise taxes on business – they’ll hire less people”

    Sometimes I wonder what world you live in, where is your evidence of this, in any case they are not hiring new workers in any great numbers now, are they? There is absolutely no reason why taxes should not be raised on medium to large scale business. In fact it might also help if the public sector was expanded just a little to make sure people, especially business, pay their legal share of taxes and to shut down the semi criminal dodges their corporate Tax lawyers think up.


    What silly bad boys and girls those Greek workers are, they are attempting to defend their living standards when they should be sitting at home unemployed watching day time TV, and be ever grateful to their governments masters for making them redundant and placing them on the dole. Only into todays unjust world, could someone come on to slugger and condemn workers for having a secure job, decent wage and pension. In a civilised world that would be the main aim of government, but not today when fear and subservience to power is king amongst you nice middle class people, get up off your knees mate, act like a man not a serf
    As to your claim about higher wages in the Greek public sector, facts please, anyone who has lived in Greece will know, in the private sector, big and small, cash is king, corruption rife and paying tax is regarded as an abomination. Even someone who has spent a week on holiday there would understand this, indeed, like their Irish and UK counterparts, the last Greek government positively encourage tax dodging etc.

    Tell me mate, when did you last post a comment here which condemned the upper levels of management for having grossly inflated and unfair salaries and pensions and health care perks over and above the NHS, and which are out of all proportion to their workforces wages. When did you last demand they loose their jobs?

    Shall I hold my breath while you reply? You guys with your topsy-turvy way of thinking, believing almost every daft idea the money men’s media monkeys place in our tame media. I bet you believed that crap about the end of boom and bust and an ever lasting celtic tiger which led Europe.

    Still we are getting somewhere at last, Mack has finally admitted he prefers those least able to pay for the economic recession to foot the main bill, despite the fact they gained very little if anything out of the bubble economy which brought us here. Thanks mack you have gone up no end in my estimation. 😉

    There are a 101 different ways we could use to deal with this crises but governments have one. The joke is it is the very one that brought such misery to millions of ordinary people in the 1930s, cut, cut, cuts.

    It took a world war to lift the world out of that recession, with 50 million plus people dead, think that through, think about the 500K Iraqi dead and god knows how many Afghans and pause, please and ask, could we be sliding down a similar road, are the same type of people steering the ship of state? Food for thought?

    If only people used a tad of common sense, instead of all this self interested blathering. For example, if your bank manager had stolen your money, at the very least you would want him in jail, but when it comes to people bankrupting your countries, you offer those who were responsible to have a second go, and to cover up your own stupidity, you cheer on the thief’s when they steal the living of folk less fortunate than yourselves.

    By the way mack, less of that abled bodied shit, we know where that is heading, tell me this, unemployment benefit in the UK for an under 25 is about £54 per week, how much of that do you wish to cut?

    Besides, where are the jobs you pontificate about coming from, they are a mirage but whilst you are suggesting others live on a lower income, how about you stepping up to the plate and offering to make a similar sacrifice.

  • Alias

    “You guys with your topsy-turvy way of thinking, believing almost every daft idea the money men’s media monkeys place in our tame media.”

    The new big idea proffered in the media is a demand to cut public spending on services and to cut wages – but, curiously enough, only by the amount needed to ensure that bankrupt EU states can repay the debts of those private businesses whose debts they have made the taxpayer liable for. There is no demand to raise taxes on business and no longer any demand to cut taxes. Now who gains by that? It’s fairly obvious who gains by it – the same eurosystem lenders who gained by states retrospectively underwriting the losses that would have resulted to them from their own reckless lending to other private lending businesses in the eurosystem if those state did not de facto nationalise those losses, transferring them from the books of those private businesses and onto the state’s books.

    These europhile quislings have utterly destroyed the state.

  • Mack

    Mick, I’m almost at the point of giving up on this.

    I didn’t say they should cut unemployment benefit in the UK I was pointing out a trade off to you. It is not my concern what path they take in the UK. Make the effort and try and think a little more critically. See the McWilliams article for the dangers in raising taxes on business when they are struggling – or the Fine Gael proposals to reduce employers PRSI to encourage them to hire more workers..

  • bigchiefally

    mickhall – did you really just suggest we hire more public sector workers? You have seen our budget deficit havent you?

    Taking workers from other departments and putting them in your new tax crackdown might work but hiring more people to work in government is madness.

  • I am saying hire more public sector workers and we could start by hiring folk who will deal with those refuse to pay their taxes, we could pay them by results, Why not? Its how those business get their whack who are hired by the state to drive the sick, unemployed and disabled, off benefits.

    “Mick, I’m almost at the point of giving up on this.”


    Like most of us who post here, you will not stop posting as you are to fond of your own voice. You definitely did imply your favourite option is cutting jobs and benefits, etc, you have been pumping for this option for weeks if not months and implying there is no viable alternative.

    In fact I would go further you are not interested in debating any alternative. When you wrote “If we raise taxes on business – they’ll hire less people” I asked you for evidence of this and you side stepped the issue, as you often do when things do not fit into your neo liberal crank economics. I pointed out these employers are not hiring workers now, so if you raised taxes it may not create new jobs in the short term, but it would raise revenue making some of the cuts you so loudly applaud unnecessary.

    You see yourself as a liberal but you are not, your economic ideas are extremist to the core, but worse than that, they have proved disastrous, yet like a drunk driver you are unable to change course, so you go straight ahead, hoping against hope the road will not run out a second time.

    You are well aware the policies you are advocating will end with untold human misery, but you refuse to pause and even consider other options. You just plough straight on, ever confident to have the same captains on the bridge who got us HERE in the first place.

    Let me get this right, you are against tax rises on business as you say it will take money out of the economy which could be used to expand,pay inflated salaries and bonuses to management etc, but when it comes to penalising individuals by cutting benefits and sacking workers you have little to say, yet the end result would be to take money out of the economy. So why should large and medium business be protected from the economic recession when working people are not?

    I’m off anyway as i will not have a web connection for the next few days.

  • Mack

    Mick, I didn’t say I was against taxing business. You said that tax rises were a better alternative to spending cuts, I was pointing out to you that tax rises can damage the prospects of the unemployed – if they didn’t why not have 90% tax rates? Increasing taxes on business profits (in the UK) may not cost (many) jobs. But increasing costs generally will. Many small businesses aren’t paying out huge salaries to those at the top, and if they’re costs rise they have to scale back or close (perhaps if the tax rises represent a fixed cost they could expand to counter the effect, but that’s probably an unusual case). And even at the large firms the costs more likely to born by ordinary workers than senior execs (and would presumably depend what percentage of revenues goes on those super-high salaries?)

    You see yourself as a liberal but you are not, your economic ideas are extremist to the core, but worse than that, they have proved disastrous, yet like a drunk driver you are unable to change course, so you go straight ahead, hoping against hope the road will not run out a second time.

    Mick, by and large I am supportive of social and economic liberalism. People should be free to make their own way in life, without fear or our trepidation of predation by monopolies – public or private. Financial deregulation is a bad idea, we know that now, without a shadow of a doubt. Living standards are higher now than they have ever been, and in the long run they will continue to rise. I’m not sure you can say the same about any socialist system.

  • Mack,

    Whilst I am not suggesting a 90% tax rate, the top 10% should be made to pay a greater share of their income, earned and unearned, and I believe this would be popular, the reason this has not happened is the power these leaches have to influence and corrupt the media and political process. As strange as it may seem, even in the 1970s when direct taxation was higher than today, there was no massive backlash against this from PAYE workers.

    I always know when people are feeling uncomfortable when debating with me, for as a last resort or an act of desperation, they throw out a snide remark about socialist societies. Not once have I mentioned how a socialists societies economy would/should work, that is not my game. My main interest is looking for ways in which working class people can have a fair slice of the nations wealth, I, like you live in the here and now, and I leave the bright sunny uplands of the future to others.

    The fact is neo-liberal economics has proved disastrous with the average wage for tens of millions of working class people stagnating over the last decade and more, especially in the USA, but also in the UK, sadly I am not up to speed on Ireland.

    My pals skilled craftsmen, whom I used to work along side in the engineering construction industry, until the employers barred the door via blacklisting, tell me there’re take home pay, given inflation, etc, is much the same as it was a decade ago. Some even claim they are worse off today due to employers no longer paying lodge, travelling time and productivity bonuses. What ever the truth of this, although I have no reason to doubt these lads, without a doubt, many unskilled workers in this industry are worse off and are back on the lump due to the use of non union immigrant labour undercutting wage rates. I am told the Stratford Olympic site is awash with illegal lump labour, still that is for another thread, but my point is not everyone is better off these days.

    You say living standards are higher today, you should have added especially in those countries in which the equality gap is small, and by and large who have kept closer to the post WW2 social democratic state, wether Christian democratic or social democracy, Sweden, Norway, Germany, etc.

    In countries in which deregulation and neo liberal economics have run riot, the gap between the rich and economically disadvantaged has grown like topsy. These countries are also hit hardest by this recession.

    So I can say a form of socialism has led to real improvements in peoples lives and unlike the economic system you support, it has not only been the crooks and their mates who have benefited.

  • Mack

    So I can say a form of socialism has led to real improvements in peoples lives and unlike the economic system you support, it has not only been the crooks and their mates who have benefited.

    None of those countries are socialist Mick. Even in Sweden the state often competes with the private sector in ways that would be regarded beyond the pale in Britain in Ireland (i.e. parents can send their children to public or private schools & the state will pay the same amount. Public schools (state run) can go bust.
    [Edit: Glad to see your begining to embrace a form of capitalism 🙂 ]

    My pals skilled craftsmen, whom I used to work along side in the engineering construction industry, until the employers barred the door via blacklisting, tell me there’re take home pay, given inflation, etc, is much the same as it was a decade ago

    Take home pay in my industry too, largely thanks to immigration and out-sourcing to India is probably less than where it was a decade a go in nominal terms. So I earn less than I would – they earn more. They were poorer to begin with.

  • Mack

    So I earn less than I would – they earn more, you get better, cheaper (in many cases free) computer software, services etc