Jörg Bibow hits the spot again

This time regarding the exchange rate of the euro and whether or not this is a problem. In short he states that the euro should appreciate even more, because that would lead to a global rebalancing which is needed in view of the Eurozone’s external surplus.

Bibow again shows the sources of the eurocrisis (or its political “resulution”) lies in German policies. In short, with German real wages repressed for a long time, European wages in decline and business costs flat or even in decline, it is not a surprise that we might be seeing deflation. An excerpt:

While externally wage repression is normally an act of pure folly under flexible exchange rates, much damage is done internally. For wage repression undermines private spending, both consumption and investment. And notoriously depressing domestic demand, in turn, has budgetary consequences which, under the so-called Stability and Growth Pact, trigger austerity; further amplifying economic weakness. The continued pursuit of this strategy in an economy that is at the brink of deflation turns suicidal when that economy is also burdened with excessive debt legacies. As the IMF recently warned, debt deflation processes set in even before prices are actually falling. Trying to work off debt overhangs under deflationary conditions is self-defeating; unless currency weakness propels exports sufficiently to offset the self-inflicted wreckage. Seen in this light, euro policymakers’ nervousness about euro strength seems understandable – without however making their grossly negligent conduct any more excusable.

I suspect texts like these are very hard to read for anybody who is convinced of the correctness of the German policy prescription. Also in Finland labour market partners and government compare the Finnish situation to the German one and aim for similar unit labour costs – without seeming to understand that a) achieving this will take many years and b) it might not even succeed if German real wages still fall. That is leaving the social aspects out and all that is logically inconsistent with this kind of policy (Finland cannot be a low labour cost country whereas Germany aims to be one, with its large Central European Hinterland, Germany’s workshops).

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