Friday, March 5, 2010
Bail out the borrowers! Shaft the savers!
At the root of the problems in the PIGS is the fact that their prices and wages have risen much faster than those of Germany and other eurozone members. This loss of competitiveness can no longer be compensated for by currency devaluation. Wage pressure and rigid labour laws across most of these countries did not help either. In most countries, cutting actual wages is politically difficult if not altogether impossible. But, to regain competitiveness and balance the books, real wage adjustments are sometimes inevitable. A slightly higher level of inflation allows for this painful adjustment with a lower level of political conflict. Ultra-low inflation, on the other hand, can easily become deflation in a recession. Falling prices encourage people to defer spending, which makes things worse.