The Economists’ Warning

23 Sep, 2013 at 22:27 | Posted in Economics, Politics & Society | 1 Comment

euro_1805998cThe European crisis continues to destroy jobs. By the end of 2013 there will be 19 million unemployed in the eurozone alone, over 7 million more than in 2008, an increase unprecedented since the end of World War II and one that will stretch on into 2014. The employment crisis strikes above all the peripheral member countries of the European Monetary Union, where an exceptional rise in bankruptcy is also under way, whereas Germany and the other central countries of the eurozone have instead witnessed growth on the job front. This asymmetry is one of the causes of Europe’s present-day political paralysis and the embarrassing succession of summit meetings that result in measures glaringly incapable of halting the processes of divergence under way. While this sluggishness of political response may appear justified in the less severe phases of the cycle and moments of respite on the financial market, it could have the most serious consequences in the long run.

The European authorities are … now making a new mistake. They appear to be convinced that the peripheral member countn solve their problems by implementing “structural reforms”, which will supposedly reduce costs and prices, boost competitiveness, and hence foster export-driven recovery and a reduction of foreign debt. While this view does highlight some real problems, the belief that the solution put forward can safeguard European unity is an illusion. The deflationary policies applied in Germany and elsewhere to build up trade surpluses have worked for years, togeteher with other factors, to create huge imbalances in debt and credit between the eurozone countries. The correction of these imbalances would require concerted action on the part of all the member countries. Expecting the peripheral countries of Union to solve the problem unaided means requiring them to undergo a drop in wages and prices on such a scale as to cause a still more accentuated collapse of incomes and violent debt deflation with the concrete risk of causing new banking crises and crippling production in entire regions of Europe.

It is essential to realise that if the European authorities continue with policies of austerity and rely on structural reforms alone to restore balance, the fate of the euro will be sealed. The experience of the single currency will come to an end with repercussions on the continued existence of the European single market. In the absence of conditions for a reform of the financial system and a monetary and fiscal policy making it possible to develop a plan to revitalise public and private investment, counter the inequalities of income and between areas, and increase employment in the peripheral countries of the Union, the political decision makers will be left with nothing other than a crucial choice of alternative ways out of the euro.

Emiliano Brancaccio and Riccardo Realfonzo (Sannio University, promoters of “the economists’ warning”), Philip Arestis, James Galbraith, Alan Kirman, Dani Rodrik, Engelbert Stockhammer, Malcolm Sawyer …

Financial Times

[h/t Jan Milch]

1 Comment

  1. Those economists’ phraseology and/or ideas are very defective. They say:

    “Expecting the peripheral countries of Union to solve the problem unaided means requiring them to undergo a drop in wages and prices on such a scale as to cause a still more accentuated collapse of incomes and violent debt deflation…”

    The reality is that if wage AND prices fall by about the same amount, living standards in the relevant country are not much affected, plus the country becomes competitive which in the long term solves its problems. Of course it’s then harder to pay debt owed to foreigners, but that doesn’t matter as long as the country has a healthy balance of payments. Creditors are happy to lend to a competitive country at reasonable rates so as to give it time to pay.

    What they could have said, and which would have been a valid point is something like, “The process of attempting internal devaluation involves a long period of excessive austerity or deflation”.

    As to “develop a plan to revitalise public and private investment” that’s just hot air. That on its own will never bring costs down within any reasonable time. As to “develop a plan to… increase employment”, that’s just more hot air. Plus the web site set up by those economists doesn’t say what their “plan to increase employment” actually consists of.

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