WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.
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.
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?
No bio, some books worth reading – The Rational Optimist: How Prosperity Evolves – Matt Ridley .
Crisis Economics: A Crash Course in the Future of Finance -Nouriel Roubini, Stephen Mihm