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they don't necessarily do so. Greek (and Spanish and Portugese and Irish, et c) wages went up way too high over the past decade of a crdit-fuelled boom in each country. Now, it is time for those wages to come back in line with core-EU wage growth (say to levels in France and Germany).

Lower the wages, you make the country's exports cheaper and more competitive abroad, increasing demand for them. Make other country's imports more expensive via negotiated lower industry- or country-wide wage cuts increasing likelihood of demand substitution of domestically-produced goods, also increasing (relative) demand for those goods.

Lower wages can indeed mean higher demand, not lower.

The key is for wage concessions to be progressive, to fall most heavily on higher-wage earners, thereby resulting in a higher level of income and thereby social cohesion, which you can measure via the Gini coefficient (among other measures)...

Can Greece do this? No, probably not, it requires real socialism, not the bland Pasok (tm) brand of liberal social democratism. But, in any event, there is nothing inherently negatively correlated in the  wage/demand relationship. And, inflating ones' self out of a mess, as Italy and Greece spent the better part of the post-war era doing, while sometimes efficient, more often than not is a politically expedient way to ensure the same inequalities (economic, political, social) remain in place all the while giving all classes a semblance of moving forward. It is indeed important for all to have a job; it is equally important that all have a legitimate shot of equality for self and for children.    

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Thu May 6th, 2010 at 04:53:43 AM EST

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