Welcome to European Tribune. It's gone a bit quiet around here these days, but it's still going.
Here's a few paragraphs from the article: How to deal with Europe's debt challenge By Guntram B. Wolff, 17.02.2012
In such a situation, more exports are necessary as domestic growth is hampered by the deleveraging. To increase exports, competitiveness gains are inevitable and they can be achieved by downward wage adjustments. Wage adjustment will, however, lead to export success only after some time as business needs time to invest. In the short-run, the downward wage adjustment therefore aggravates the situation as wages fall but unemployment remains high. This is why the Troika in its first programme for Greece decided against cutting the 13th and 14th salary of Greek workers. It was feared that the same debt burden would need to be serviced with lower wages.
So, he's basically saying that the Troika went too easy on Greece, that even more pain should have been front-loaded and that the "reforms" have been too slow.
On the internal side, the fiscal consolidation should be made as little harmful to growth as possible by choosing the right mix of spending cuts and tax increases. Bad assets in the banking system resulting from the debt overhang in the household and corporate sector should be recognized with rigorous stress tests. The EFSF funds should be used for bank recapitalization and should be provided to governments at very low interest rates. Addressing these banking problems is central to making sure that credit is available for investment in export industries. Strong competition policy should be used to make sure that wage cuts lead to lower prices of export goods and do not just deliver larger corporate rents. Finally, a supply side agenda with the aim to improve education systems, innovation and business conditions is needed.

Besides domestic reforms, a forceful European policy response is needed. To be able to export, demand in the euro area as a whole needs to be appropriate. In current recessionary conditions, it is very difficult to grow exports. The responsibility of monetary policy in such a context is to avoid a recession and ensure price stability for the euro area as a whole. This means that once inflation rates in Southern Europe fall below 2%, inflation rates in particular in Germany will have to increase above 2%. Monetary policy should allow for such booming conditions in Germany and German policy making should not resist this adjustment. Moreover, fiscal policy instruments at a eurozone level may need to be developed if the recessionary environment deteriorates. A European wide investment strategy, for example in the area of energy transition, would be a potential candidate. Finally, structural funds should be used in a more targeted way to help grow exports in the South. Dealing with a debt overhang and competitiveness adjustment requires an effort by the eurozone as a whole.

tens of millions of people stand to see their lives ruined because the bureaucrats at the ECB don't understand introductory economics -- Dean Baker
by Migeru (migeru at eurotrib dot com) on Fri Feb 17th, 2012 at 05:34:55 AM EST
[ Parent ]
I don't suppose Herr Wolff provides any specifics as to what are and why regarding "the right mix of spending cuts and tax increases"? I do not believe the existence theorem has been satisfied or that it can be.  It is much more likely that a Gödel like proof of the impossibility of such a solution could be found. He is basically invoking fairies. After all, he talks of 'inflation rates' in a country caught in a debt-deflation death spiral.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Fri Feb 17th, 2012 at 09:29:51 AM EST
[ Parent ]
In the first part he's (like others in charge of policy) looking for an excuse to explain why "reforms" aka wage suppression aren't working: too little, too late. Though behind the reasoning he seems uneasily aware that building exports on wage cuts at a time of private-sector deleveraging and recession is... difficult. Yet only exports, he says, can save the economy...

The final paragraph contains some more reasonable points. One is suggesting an anti-recession responsibility for the ECB and admitting that, if there's deflation in the periphery, Germany has to accept inflation. The other is European-wide long-term investment in infrastructure, example energy.

So not entirely in(s)ane.

by afew (afew(a in a circle)eurotrib_dot_com) on Fri Feb 17th, 2012 at 10:37:31 AM EST
[ Parent ]


Top Diaries

Occasional Series