BEAT THE PRESS (NYT)

Inflation Will Matter for the Future of the Euro

December 1, 2011   ·   2 Comments

Source: Beat the PressBeat the Press

By Dean Baker:

The NYT Magazine had a useful piece outlining some of the key issues on the future of the euro. It would been helpful to mention the issue of euro zone inflation as one of the key factors affecting the ability of euro zone countries to get through the crisis. The southern euro zone economies are currently uncompetitive with Germany and other northern euro zone economies. They can regain competitiveness either by having their nominal wages fall (the path suggested in the piece) or by having their wages and prices rise less rapidly than in the northern European economies.

The former path is extremely painful. It would require many years of high unemployment. Even then, success is far from assured. One effect of falling prices is that the debt burdens of these countries would increase in real terms. (If wages and prices fall by 10 percent, then Italy’s 2 trillion euro debt is 10 percent larger relative to the size of its economy.) Falling wages and prices are also likely to discourage investment, since businesses will know that the products that they will be selling in 5 or 10 years will get lower prices than they would today.

The alternative route to regaining competitiveness would have a somewhat higher euro zone rate of inflation, which would allow the southern euro zone countries to regain competitiveness by having a lower, but still positive rate of inflation. However, going this route would require the European Central Bank to loosen its commitment to maintaining a 2 percent rate of inflation.

By admin

Readers Comments (2)

1. Nobull says:

   Why “either/or”? Wages are going to drop in these southern Euro countries no matter what. And if you let in higher inflation, real buying power drops anyway so whichever course you suggest, it comes out the same as far as actual humans are concerned. Italy, Spain, Greece are going to suffer and pay now for the good times they (some of them) have enjoyed before and even then they have no sure route to recover. How long do they have to pay? For the entire lives of heir children and grandchildren? It’s up to the political leadership (the winners) to get the ship of state back on course. Uh oh. In any economy there are winners and losers. Question is, do the winners want to help their own society which enabled their success? By taking less, modeling unselfishness and letting the social institutions-education, services and open good government-have a shot at improving their own society-on not? No. This isn’t socialism. It’s about doing the right thing before it’s too late. What you pols promised when you were elected. Now or never. Find the courage and borrow the wisdom. Same to you Mr. Baker. You don’t need to tell us what we already know.

   9:56 am on December 3, 2011

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2. Nobull says:

   Oops. You aren’t the person I thought you were Mr. Baker. Different Dean Baker. But still…there’s going to be inflation and there’s going to be a loss of wages in Europe, there’s going to be hardships and individual suffering. Ready or not, here it comes. The problem-even biting the bullet and doing the right thing now may not be enough to dig Europe out of its mess. They need us to get back on track and we need them. And everyone needsto stay positive-including me!

   10:28 am on December 3, 2011

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