Friday, December 23, 2011

A Club Med solution for eurozone’s woes

by James Mackintosh

Financial Times

December 22, 2011

Sun, sea, sand and sex have not featured, so far as we know, at any of the numerous summits of eurozone leaders over the past two years. But perhaps the solution to the crisis in the “club med” countries is, well, Club Med.

Start with the problem: at heart, Germans and other rich residents of cold parts of the eurozone are not willing to buy enough stuff from the poorer, hotter countries to balance peripheral current accounts, let alone their budget deficits. This is because the peripheral country workers charge too much, or as economists put it, their unit labour costs became uncompetitive under the euro.

The Berlin-backed solution is to slash wages in the periphery, in economist-speak an internal devaluation. As unfortunate residents of those countries are finding, this is extremely painful, with Portugal, Ireland, Italy, Greece and Spain in, or verging on, recession. Germany will feel the consequences, too: cash-strapped customers in hot countries will no longer buy air-conditioned Porsche Cayennes.

An alternative could be dubbed the Club 18-30 solution. For Greece, 1830 is the year it won independence (borders were not fixed for two more years), but I’m more interested in the downmarket tour operator.


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