Internal Deflation Posing Growing Problems Even In The Eurozone

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In a currency union, with no homegrown currency to devalue (relative to your main trading partners), internal price deflation is really the only option for addressing a proce competitiveness problem. But (as I explain here) this is a very difficult road to follow as the Irish government are currently discovering. Excesses on the upside were easy, and (more or less) popular, but on the downside they are another matter altogether.

The Irish government is facing growing calls to abandon the centrepiece of its economic recovery plan after large-scale public protests at the weekend organised by the main trade unions.

A controversial proposal to impose a levy on the pensions of public servants – effectively a pay cut for the 350,000 state employees from ministers to local authority workers – drew 100,000 ordinary people on to the Dublin streets on Saturday in a protest organised by the Irish Congress of Trade Unions.

The levy is the centrepiece of an economic stabilisation programme announced last month aimed at curbing a ballooning budget deficit which, even with the proposed savings, is set to reach 9.5 per cent of gross domestic product this year. This is more than three times the fiscal benchmark set by the European Union.

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About Edward Hugh

Edward 'the bonobo is a Catalan economist of British extraction. After being born, brought-up and educated in the United Kingdom, Edward subsequently settled in Barcelona where he has now lived for over 15 years. As a consequence Edward considers himself to be "Catalan by adoption". He has also to some extent been "adopted by Catalonia", since throughout the current economic crisis he has been a constant voice on TV, radio and in the press arguing in favor of the need for some kind of internal devaluation if Spain wants to stay inside the Euro. By inclination he is a macro economist, but his obsession with trying to understand the economic impact of demographic changes has often taken him far from home, off and away from the more tranquil and placid pastures of the dismal science, into the bracken and thicket of demography, anthropology, biology, sociology and systems theory. All of which has lead him to ask himself whether Thomas Wolfe was not in fact right when he asserted that the fact of the matter is "you can never go home again".

2 thoughts on “Internal Deflation Posing Growing Problems Even In The Eurozone”

  1. Pingback: Internal Deflation Posing Growing Problems Even In The Eurozone | Expat Life Spain

  2. I dunno, sir. Two pieces of data are confusing me here.

    First, it seems as though inflation is declining across the eurozone. I.e., it seems like the eurozone needs to reflate. I’d be more than a little worried about devaluation in a world where currency mismatch is widespread and other countries might do same.

    Second, AFAICT the widening of bond spreads has not been reflected in a widening of other interest rate spreads across the eurozone. Caveat: the ECB data is monthly, runs only through December, and is hard to read. So that stylized fact may not be a fact. But if it is, the implication is that the markets don’t view private debt instruments as particularly good substitutes for the bonds of the government under whose jurisdiction they fall. Which in turn means that the widening of government bond spreads won’t have the bad effects that it does in places that have their own currencies.

    I could be wrong. But I’m really not sure that the euro is a problem for places like Ireland and Spain. The counterfactual seems at least as bad.

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