How’s That “Make People Poorer” Strategy Working Out?

Michael Stephens | May 24, 2012

There is no shortage of viable economic solutions for the eurozone.  But as Martin Wolf points out in his FT column, once you strike all of the solutions that have been declared politically unacceptable (eurobonds, a stronger EU-level fiscal authority), there aren’t too many policy levers left to pull.  One possibility Wolf mentions is to encourage faster adjustment within the eurozone by allowing higher inflation in the core (Germany) than in the periphery—but Germany is unlikely to accept that either.

Instead, we’re left with trying to achieve adjustment through internal devaluation (declining wages in the periphery).  How’s that going?  C. J. Polychroniou checks in on the progress in his latest one-pager:

The “internal devaluation” policy pursued by Germany, the European Central Bank, and the European Commission can be summed up in a few words: great pain, no gain. The irony of this seems not to have escaped the attention of the Brussels bureaucrats: the Commission’s spring economic forecast, released just a few days ago, observes that “wages in the business sector have been falling in recent quarters but at a pace that was insufficient to help recover competitiveness.” Still, the report injects a note of optimism by stating that “the recent labour market measures are expected to contribute to further significant reductions in labour costs over the next two years.”

The Commission also acknowledges that the “current-account deficit . . . remains at an unsustainable level.”

Polychroniou also assesses what the emergence of Syriza means for the future of Greece and eurozone negotiations. Read it here.

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