Austan Goolsbee, formerly the chairman of the Council of Economic Advisors, is now blogging. In one of his first entries, he describes the problems facing the eurozone countries.
Southern Europe has had low productivity growth and Northern Europe high productivity growth. Normally, a country getting into trouble like that of Southern Europe would have a devaluation and use exports as their growth strategy. But locked in at the high exchange rate, S. Europe can’t do that. Without growth and with the credit contraction from the banks trying to reduce their leverage because of the banking crisis, these countries’ deficits are awful and likely to get worse. Even the most savage austerity really isn’t going to fix this problem.
We know a lot about how very different economies can be held together in a monetary union. Choose one: 1) The rich guys subsidize the poor guys permanently. 2) A massive exodus of people goes from the poor guys to the rich guys or 3) the poor guys experience massive, extended unemployment and stagnation as they try to grind down everyone’s wages and do the equivalent of a devaluation.
He predicts reoccuring financial blow-ups, followed by new subsidies from the rich countries. At least for as long as the richer members are willing to pay for it, and given current trends I doubt that will last much longer.
Spain, and other similar countries, desperately need to grow. Lower labour costs, to boost exports, is the most obvious way to achieve that in the short run. (In the long run they need structural reforms.) Voters will not accept large wage cuts, and the only alternative is to leave the euro and print money, like they have in the past.
As I have stated earlier: I am surprised by how much pain the people of the Southern European countries are willing to suffer, to save the euro. Or rather, how much pain their governments, pressured by the EU machinery, are willing to inflict on them.
It would be better if they left the euro in an organized fashion, rather than the whole system falling apart.