By Matias Vernengo
With regard to the European crisis is central to the different opinions of the authors and conservative progressive, the issue of causation of the crisis as fiscal or external. While causation is a thorny issue, the evidence can illuminate empirical question. The following chart (Fig. 1) shows the evolution of unit labor costs in Germany, and the group of peripheral countries, sometimes referred to by its acronym (PIIGS), which were affected by the crisis, or are close to this position .
This shows that while the German unit labor costs remain essentially constant, increasing only 6 percent in all other countries the increases were about more than 30 percent. This translates into a significant real appreciation of the real exchange rate at the periphery of Europe.
conventions of the euro as opposing currency depreciation to offset nominal wage growth in the periphery in relation to German wages. In addition, there are few mechanisms for large fiscal transfers to compensate for the loss of competitiveness associated with lower production in countries with higher costs.
In fact, regional disparities in the EU is very clear (Figure 2). With the exception of Portugal, who had a current account deficit of over 6 percent when the euro was created, all other countries were essentially about a balance in its external accounts. In the first part of the decade the current account of all countries, with the exception of Italy, deteriorated significantly, while Germany's external position was strengthened. In other words, it seems quite reasonable to believe that unit labor costs hit the external performance of European economies, and that the common currency was critical to this outcome.
addition, Figure 3 shows that fiscal balances deteriorate significantly only after the crisis in 2007. Fiscal balances were more or less stable, and in some cases were clearly positive, as is the case of Ireland and to a lesser extent in Spain. In all cases, the deficit is carried out only after the recession has already occurred. It seems quite clear that the fiscal surplus was not in the heart of the European crisis. In fact, when we look at debt as a proportion of GDP (Figure 4), it is clear that the debt remained relatively constant or declining in all cases, without exception, until the crisis of 2007-8. Only then will the public debt levels are increasing at a significant pace.
evidence against a fiscal crisis is so clear that it is somewhat surprising that the academic and political debate is fundamentally about whether the Stability and Growth Pact should be strengthened or should be implemented a new deal to promote fiscal centralization supra-national level. In fact, according to Charles Wyplosz only two views on how to resolve the crisis: the German perspective, which involves a reform of the euro zone's stability and Growth Pact (SGP), and institutional point of view alternative to which Wyplosz undersigned agree that a reform of EU institutions is needed to impose fiscal discipline on the institutions of sovereign nations, and that a revised GSP would be doomed to failure.
Please note that the effort of fiscal centralization is seen as a necessary step toward strict fiscal adjustment, not to reduce problems related to the common currency, as the promotion of fiscal transfers to struggling economies.
In fact, the letters of intent from the two countries have already negotiated with the EU and the IMF clearly accept the idea that fiscal adjustment is essential, even in front of a recession. Greece is committed to a 40 percent reduction of its deficit in one year, while Ireland suggests that it will reduce its deficit to 9 percent of GDP to less than 3 years. In both cases, recovery is expected to come from the external sector, which must mean that there is an expectation that deflation will do the job of increasing external competitiveness.
These developments do not bode well for the future of European recovery for the euro, and therefore the world economy, which will be adversely affected by a slow recovery in Europe.
Original: Triple Crisis
0 comments:
Post a Comment