Myths about the Eurozone crisis19 July, 2015 at 10:17 | Posted in Economics | 4 Comments
1. It is “an indisputable fact” that excessive state spending and unsustainable public debts did not cause the Eurozone crisis. Sovereign debt build-up was dwarfed by the accumulation of private-sector debts … which fuelled and were made possible by unsustainable asset-price booms. Fiscal austerity is the wrong medicine for the wrong disease, bringing only pain (first)—and no gain (later).
2. The rise in (relative) unit labour costs did not lead to the higher current account deficits in the Eurozone periphery. International competitiveness is not about wage costs, but about technology and innovation. Given a country’s technological capabilities as reflected by its productive structure, export growth and import growth are overwhelmingly determined, not by unit labour costs, but by (foreign and domestic) demand. Attempts to improve “competitiveness” by wage cuts and labour market deregulation can only backfire — no country has managed to climb up the technological ladder (upgrading exports and strengthening non-price competitiveness) based on low wages and footloose, fractured and flexible workers …
3. The only sensible way to think about the Eurozone crisis is in terms of a private-sector debt crisis, aided and abetted by the liberalization of (integrating) European financial markets and a “global banking glut”. With this understanding, we can start thinking about more effective, efficient and just ways to bring about economic recovery in the Eurozone. Without doubt, such a recovery package must include a coordinated demand stimulus, a directing of credit towards productive investments and “smart” innovation (also through a “socialization of investments” à la Keynes), a bailing out of cash-strapped and insolvent governments (by the ECB), and “mission-oriented” industrial policies to restructure and upgrade peripheral manufacturing … This requires, at the EU level, coordination of economic decision-making, or what Beck (2013) calls a “new social contract for Europe”— not the beggar-thy-neighbour competition propagated by JTDD or the “eat your peas” solution of Mr. Schäuble.