Monday, February 27, 2012
A Euro Sabbatical
February 27, 2012
Under substantial external pressure, the eurozone’s crisis-hit countries are, at long last, bringing themselves to make painful cuts in their government budgets. Salaries are being slashed and public employees sacked to reduce new borrowing to a tolerable level.
And yet, competitiveness in Greece and Portugal, in particular, is not improving. The latest Eurostat figures on the evolution of the price index for self-produced goods (GDP deflator) show no tendency whatsoever in the crisis-stricken countries towards real devaluation. But real devaluation, achieved by lowering prices vis-à-vis their eurozone competitors, is the only way to re-establish these countries’ competitiveness. A reduction in unit labor costs can also increase competitiveness only to the extent that it actually results in price reductions.
After all, it was price inflation in the crisis countries, fueled by massive inflows of cheap credit following the introduction of the euro, that resulted in their loss of competitiveness, ballooning current-account deficits, and accumulation of enormous foreign debt. Now that capital markets are no longer willing to finance these deficits, prices should be going into reverse, but this, obviously, is not happening.
Posted by Yulie Foka-Kavalieraki at 7:49 PM