[lbo-talk] Krugman: The existence of the Euro means massive falling wages

Michael Pollak mpollak at panix.com
Mon May 17 12:03:32 PDT 2010


http://krugman.blogs.nytimes.com/2010/05/17/et-tu-wolfgang

Paul Krugman - New York Times Blog

May 17, 2010, 9:42 am

Et Tu, Wolfgang?

Perhaps the most startling and frustrating thing about the debate over

the fate of the euro is the way almost everyone avoids confronting the

core issue -- the elephant in the euro. With a unified currency,

adjustment to differential shocks requires adjustments in relative

wages -- and because the nations of the European periphery have gone

from boom to bust, their adjustment must be downward. At this point,

wages in Greece/Spain/Portugal/Latvia/Estonia etc. need to fall

something like 20-30 percent relative to wages in Germany. Let me

repeat that:

WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.

But nobody is willing to say that outright. Even the ever-pessimistic

(and hence realistic) Wolfgang Munchau writes

<quote>

None of the governance reform proposals that are currently discussed

even attempt to answer the questions of how Spain is going to get out

of this hole, and how the competitiveness gap between the north and the

south of the eurozone is going to be closed ... What the eurozone needs

is an increase in domestic consumption in the north, particularly in

Germany, and labour and product market reforms in the south, most

importantly in Spain.

<unquote>

How many readers will get that what he's really saying is that

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.

Anyway, this is my morning euro rant.



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