The EMU strategy of wage deflation across half Europe is simply not doable. It was tried in the early 1930s, with results of varying awfulness.
So says the estimable Ambrose Evans Pritchard in the Daily Telegraph. Perhaps he is right in the sense that Europe is not socially and politically capable reducing wage bills. However in terms of economics, it is surely highly desirable that the countries which find their wage bills are too high in relation to their productivity should move to lower wages. This should be done not by national government diktat but simply because there is nothing in the way of it such as over-mighty unions supported by absurdly inflexible laws.
Several of the southern countries in the Eurozone only have three choices: inflate the currency, lower the wages or have rising unemployment along with resulting budget deficits, debt and ultimately default (what you might call the Greek solution). The southern countries – I am thinking of Spain particularly which I visited recently – cannot inflate the currency because they are not in control of it. So that leaves a choice between reducing wages and going bust.
Actually, the Spanish government has made big strides towards reducing wages. The recent changes to the labour laws have been so dramatic that there was a general strike about them. The big socialist union, the UGT, which I met in Madrid, feels very much under pressure. I met three charming, intelligent people and at the end I almost felt sorry for them, fighting a brave, rearguard action (on the wrong side). These labour law reforms should give wages in Spain more flexibility and help with the terrible unemployment (23%).
Wage flexibility, incidentally, has long been a key element in the success of Hong Kong. When their products were not selling well internationally, wage rates fell until they became commercially competitive again. As productivity rose, wages could rise again. Employment used to be nearly always full. Wage flexibility is a necessary – but perhaps not sufficient – condition of full employment with a stable currency.
Update: And see this for a hint of similar labour law problems in Italy.