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I am on board with all these arguments about the need for relative deflation until we get to claims such as 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.

Considering 58% of Spanish wage earners made less than €1100/mo (gross) in 2007, and that the serious people still claim Spanish workers are overqualified...

Something is not quite right here.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 05:13:43 AM EST
[ Parent ]
hav been stagnating for 2 decades. There has been massive redistribution of wealth within Germany (a good part to Eastern Germany, a good thing), and a weakening of the position of the Western German workers, which means that the "core euro" reference is out of whack too.

Wind power
by Jerome a Paris (etg@eurotrib.com) on Thu May 6th, 2010 at 05:40:10 AM EST
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It would be interesting if the Economic policymakers of the Eurozone got their collective heads out of their neoclassical arses before all hell breaks loose.

I don't know what they're telling each other privately now, but they sounded pretty self-satisfied about fiscal austerity just just 10 weeks ago (when the Greek Tragedy was already unfolding).

We also have to acknowledge that there is a lot of uncertainty regarding the short run effects of fiscal adjustment. There is an extensive literature examining this issue and different studies have yielded quite different results. But broadly speaking, what we can ascertain from this literature is that the short run costs of fiscal adjustment are likely to depend on a variety of conditions. Notably, these costs are likely to be more limited:

  • If the fiscal starting position is precarious and the adjustment is credible;

  • If financial markets react by lowering long-term interest rates;

  • If households have correctly understood the need for fiscal adjustment and have factored this into their spending decisions; in other words, if households are - at least partly - "Ricardian";

  • and if monetary conditions are accommodative.

This last condition touches on the very subject of today's conference: monetary and fiscal policy interactions. And in certain respects, it has to be acknowledged that such interactions are particularly challenging for the euro area.
Meanwhile, the ECB's own out-of-thin-air™ definition of price stability
"Price stability is defined as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%."
is not up for discussion, just as the SGP's outlandish macroeconomic assumptions aren't.

The brainless should not be in banking -- Willem Buiter
by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 06:20:43 AM EST
[ Parent ]
It's not out of whack insofar as it is highly politically relevant.

French wages have been pretty tame too, especially relative to Greece's and Ireland's...

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

by r------ on Thu May 6th, 2010 at 10:13:39 AM EST
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I seem to have misspoke about Spain, having remembered a graph Jérôme passed aournd a while back (or maybe it was in Krugman's blog) but the statistics about wage growth are pretty starkly different on the periphery than in the core : (see nominal and real wage growth tables).

Greece and Ireland had by far the highest nominal and real wage growth in the past decade relative to other Eurozone countries, with Portugal not far behind. The same is true of the previous decade. Core Europe's wage growth is far lower than the periphery, as the periphery enjoyed a credit-filled boom.

There are multiple solutions to the problem this causes for each of these three country's Current Accounts issues, one of which would be  direct aid through a strong EU to the periphery (obviously not politically palatable) but if there's no underlying productivity growth (and I don't think there was, these were banking and property bubbles largely) there's not rationale for relative wage growth.

The key is to make the top end pay, but unless the EU is strong enough to bite the bullet and provide direct employment aid to the periphery, you either manage deflation, suffer deflation, or engage in inflation, the latter involving default/debt restructuring and likely ejection from the Eurozone....

I for one am still trying to figure out how Greece was allowed in the Eurozone in the first place. In private business, a due diligence failure of that magnitude would be career-ending. I wonder how the ECB and the EC are handling this egregious failure of due diligence...likely, failing someone upwards, as usual.


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

by r------ on Thu May 6th, 2010 at 10:12:34 AM EST
[ Parent ]
I seem to have misspoke about Spain, having remembered a graph Jérôme passed aournd a while back (or maybe it was in Krugman's blog)

There is a graph in Krugman's Spanish Doldrums (March 14, 2009) which he basically uses to argue that Spain needs 20% relative cost deflation between itself and Germany.

Now that boom is over. But it left as its legacy a sharp rise in Spanish costs and prices relative to the rest of the euro zone (the chart below is Spanish unit labor costs in manufacturing relative to the EZ average, but it doesn't much matter which measure you use):
There's something really wrong about 20% higher than average labour costs with 58% of the population making less than €14k a year (gross), and I'd like to know where Spain's "labour costs" are going because it's not wages.
The key is to make the top end pay
If you see the baseline scenario post in a top level comment, what we're getting is Greece being gutted for the purpose of serving as a conduit for government funds from the rest of the Eurozone going to bail out the French adn German banks who are Greek creditors.

It is apparent, given the public debt figures in the various countries over the past 10 years, that what has been going on for 10 years is that German banks have lent money to peripheral economy consumers to buy German cars, as well as to German retirees to buy hiliday homes on the Mediterranean, fuelling an unqualified-labour and land-value speculative boom in the peripheral economies. Now the banks are going to destroy Germany's Eurozone export markets in order to collect.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:22:02 AM EST
[ Parent ]
I am wondering, you know how many Spaniards are not wage laborers but are, like is beginning here in France, independent workers.

I am wondering if this is a factor which distorts Spanish wage statistics.

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

by r------ on Thu May 6th, 2010 at 10:32:00 AM EST
[ Parent ]
these data were from the Tax Agency (Agencia Tributaria) so presumably they don't distinguish whether "work income" comes from wages or from being self-employed. Of course, Spain also has a large underground economy, and many of the independent workers, liberal professionals, etc, misrepresent their income (and evade VAT by taking cash payments without receipts).

However, it has also become relatively common for a firm to take on a full-time worker but to force them to register as self-employed, so that all the social security overhead costs are taken from the worker's gross pay. That only adds to the sense that the "labour costs" cannot be that high, since companies are allowed to get away with offloading the overhead on the workers.

The brainless should not be in banking -- Willem Buiter

by Migeru (migeru at eurotrib dot com) on Thu May 6th, 2010 at 10:40:30 AM EST
[ Parent ]
I don't understand that paper.

Firstly, are they using median or average wages? Insane bubbly compensation in finance will distort both. So it's more useful to compare wage growth by sector, splitting off the financialised economy from the rest.

Secondly, there seems to be some confusion about whether wage growth is a good thing or a bad one.

Which leads to an interesting question - if growth and producvitity are good but wage growth is bad, where does the money go?

Finally, isn't 'wage growth' really just harmonisation, and exactly what you'd expect in a common trading area? Considering that the periphery was always less marginally dynamic than the core, I don't see why wage growth would be considered a problem.

I suppose the implication is that wage increases aren't really affordable - but then you'd expect the ECB to say that for ideological reasons.

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 10:39:13 AM EST
[ Parent ]
Table 9 on page 29.
by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:06:00 AM EST
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Yes, the periphery had high wage growth, but from a very low level - so you end up with this: Ireland bang in the middle of the Eurozone (per hour), Portugal and Greece and Spain way down the bottom. There's a significant element of catch-up.

by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:03:41 AM EST
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How do the wages compare with productivity?

Be nice to America. Or we'll bring democracy to your country.
by Drew J Jones (pedobear@pennstatefootball.com) on Thu May 6th, 2010 at 11:13:45 AM EST
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How do the wages compare with local living costs?
by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 11:15:37 AM EST
[ Parent ]
by afew (afew(a in a circle)eurotrib_dot_com) on Thu May 6th, 2010 at 11:25:29 AM EST
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Very good, in the Irish case, at the time, if you use GDP.

Ok, in the Irish case, at the time, if you use GNP.

Currently? Who knows? Wage and compensation cuts are helping GNP spiral downwards (though it seems to be bottoming out for the moment) so it probably doesn't look so good right now. On the other hand, the economic studies don't mention wages as being a problem for competitiveness until the executive summaries, as far as I can make out.

by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 11:19:51 AM EST
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"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:03:48 PM EST
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Can we have a source for that?
by Colman (colman at eurotrib.com) on Thu May 6th, 2010 at 12:07:05 PM EST
[ Parent ]
Source of the graph: The crisis in Spain: So hard to bend | The Economist
In the euro's first ten years, output per worker rose by an average of 0.2% a year. In some years it fell even as wages grew quickly, which chipped away at Spain's cost competitiveness (see chart).


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:09:59 PM EST
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Oh, a massive average(?) increase of 5%, in the best of years.

What was inflation doing during this time? What was the property market doing? And as for stocks:

by ThatBritGuy (thatbritguy (at) googlemail.com) on Thu May 6th, 2010 at 12:42:01 PM EST
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"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:07:54 PM EST
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Source: Spain: economic adjustment in a strait-jacket - econoblog101
Remember: this is only productivity. Germany had falling real wages for the last 8 years or so while wages in Spain were growing (see graph from The Economist below)


"Ce qui vient au monde pour ne rien troubler ne mérite ni égards ni patience." René Char
by Melanchthon on Thu May 6th, 2010 at 12:13:00 PM EST
[ Parent ]

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