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.