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

Michael Pollak mpollak at panix.com
Mon May 17 22:54:03 PDT 2010


On Tue, 18 May 2010, Mike Beggs wrote:


>>   WAGES IN THE PERIPHERY NEED TO FALL 20-30 PERCENT RELATIVE TO GERMANY.
>
> It is bloody interesting, isn't it? One of those situations where every
> possible outcome looks highly unlikely.

True. But what attracts me is the idea that these savage falls are inherent in the Euro as presently structured -- that every time there is a boom there will be divergence, and every time there is a downturn the readjustment will have to be achieved by savage wage cuts somewhere. Which means it will have to happen every 5-10 years. What's hidden it so far is that they had 10 years of boom. (Actually more like 6 years of boom, 2 years of not yet synced before, and 2 years of not realizing what a procrustian bed they were afterwards).

The average falls won't be as savage as this, which is a system-wide financial crisis on top of a cyclic downturn. But they will always be savage because they can only happen by cutting nominal wages -- which is the definition of savage wage cuts.

Economists have said this from the beginning, but nobody believed it, not even them really. When it fully sinks in -- plus the number of years and the extent of the savagery it will take to get this crisis solved -- plus the way the bond and currency markets are going to understand this first and enforce it -- it seems clear the present euro system is looney. Either they give it up or they create a transfer Euro so that the adjustment at the end of every business cycle can happen some other way.

Put like that, it seems clear the odds on the former are higher. In fact I'd say the former is virtually certain until the day a German politician can publicly say the phrase "transfer euro" as if it was a good thing. Right now it's like saying you're for pollution.

Michael



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