FacebookTwitterGoogle+RedditEmail

The New Tyros of the Eurozone

by DEAN BAKER

The eurozone crisis countries still have not developed a workable strategy for countering the policies being imposed by the troika — the European Central Bank (ECB), the IMF and the European Union. Their main problem is not profligate government spending, as fans of data everywhere have long known; the problem is an imbalance in relative prices between the crisis countries and Germany and other northern countries.

This imbalance is causing the crisis countries to run chronic trade deficits. Prior to the collapse of housing bubbles in the peripheral countries, this deficit was financed primarily through massive lending to the private sector in the crisis countries by banks in the northern countries. Since the collapse, the trade deficit has been largely financed with official lending to peripheral country governments. However the core problem is the trade deficit, not government borrowing in the crisis countries.

Prior to the creation of the euro, this problem of competitiveness would be easily addressed by a fall in the value of the currencies of the peripheral countries relative to the currencies of the core countries. However with the single currency, this is not an option.

The easiest path to resolving the imbalance in the context of a single currency would be to have Germany and other core countries experience a more rapid rate of inflation (e.g. 4-5 percent) so that the peripheral countries could regain competitiveness with a low positive inflation rate. Unfortunately this path also is apparently not an option.

All the major political parties in Germany resist a higher inflation rate with the same vehemence as fundamentalist Christians in the United States resist the theory of evolution. Their view of the danger of moderate rates of inflation will not be changed by evidence. Just as fundamentalist Christians were brought up with their beliefs about creationism, the economists and policy makers calling the shots at the ECB had their views about inflation instilled in them at an early age. They are not going to budge.

Given the intransigence from the ECB on promoting a higher rate of inflation in the core countries as a way to redress the problem of competitiveness of the crisis countries, the logical course for the crisis countries would be to leave the euro. However for a variety of reasons, few people and even fewer politicians in the peripheral countries appear willing to go the route of a euro exit.

This means that there is no alternative to the route chosen by the troika of “internal devaluation.” The peripheral countries should recognize this basic reality, if they reject the route of euro exit. There is no other option on the table. Given the ECB’s policy on inflation, internal devaluation is the only possible way to ever resolve the crisis. That is not an arguable proposition, it is arithmetic.

However the crisis countries can make the arithmetic less painful. While the troika envisions that most of the pain will be borne by workers taking reduced pay and benefits, creative policy can direct the pain elsewhere.

An obvious place to start would be to force property owners to take a hit by accepting lower rents for their houses and apartments. This can be easily done with a vacant property tax. If a modest tax (e.g. 1.0 percent of value) were imposed on properties that were vacant for more than three months, it would give property owners a substantial incentive to sell or rent out empty properties. Given the large number of vacant properties in many countries, this could lead to large declines in rent.

That in turn would mean increases in real wages. In most countries actual rent, or the implicit rent on owner occupied housing is close to 30 percent of consumption expenditures. Rent is often 40 percent or more of the expenditures of lower paid workers. If this policy could lower rents by 10 percent, it would imply an increase in the real wage of an average worker of around 3 percent and possibly more than 4 percent for lower paid workers. This should be a substantial buffer to the pain of internal devaluation.

Another route that the crisis countries could follow is to try to find creative ways to reduce payments for patent and copyright fees. These archaic property forms are an enormous drag on the economy and transfer huge sums from consumers to holders of intellectual property claims, most of whom will be foreigners.

There are vast amounts of money at stake here. For example, Spain spends roughly 1.5 percent of its GDP on prescription drugs. If drugs were sold in a free market without patent monopolies, it would spend about one-fifth as much. There is potential for huge savings in many other areas as well, such as computer software (both business and consumer), recorded music and video material, and even seeds for food crops.

The crisis countries are required by various treaties to enforce patent and copyright monopolies, but they can push these agreements to the limit, allowing for as much market competition as possible. They can also make the protection of intellectual property a low priority for law enforcement, for example by putting it behind tax evasion and financial sector fraud.

There are other, and possibly better, ways to tilt the market to produce more favorable outcomes for workers in the crisis countries. However progressives need to be looking in this direction if they are serious about combatting the troika.

The right has been using the levers of the market to redistribute income upward for the last thirty years. If progressives are too lazy to think of ways to rig the market to produce more equal distributions, then they will be losing for the next three decades as well.

Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This article originally appeared on Al Jazeera.

Dean Baker is a macroeconomist and co-director of the Center for Economic and Policy Research in Washington, DC. He previously worked as a senior economist at the Economic Policy Institute and an assistant professor at Bucknell University.

Weekend Edition
April 29-31, 2016
Andrew Levine
What is the Democratic Party Good For? Absolutely Nothing
Roberto J. González – David Price
Anthropologists Marshalling History: the American Anthropological Association’s Vote on the Academic Boycott of Israeli Institutions
Robert Jacobs
Hanford, Not Fukushima, is the Big Radiological Threat to the West Coast
Ismael Hossein-Zadeh
US Presidential Election: Beyond Lesser Evilism
Richard Falk
If Obama Visits Hiroshima
Ian Fairlie
Chernobyl’s Ongoing Toll: 40,000 More Cancer Deaths?
Vijay Prashad
Political Violence in Honduras
Margaret Kimberley
Dishonoring Harriet Tubman
Deepak Tripathi
The United States, Britain and the European Union
Eva Golinger
My Country, My Love: a Conversation with Gerardo and Adriana of the Cuban Five
Moshe Adler
May Day: a Trade Agreement to Unite Third World and American Workers
Paul Krane
Where Gun Control Ought to Start: Disarming the Police
Pete Dolack
Verizon Sticks it to its Workers Because $45 Billion isn’t Enough
Pat Williams
FDR in Montana
Dave Marsh
Every Day I Read the Book
David Rosen
Job Satisfaction Under Perpetual Stagnation
John Feffer
Big Oil isn’t Going Down Without a Fight
Murray Dobbin
The Canadian / Saudi Arms Deal: More Than Meets the Eye?
Gary Engler
The Devil Capitalism
Brian Cloughley
Is Washington Preparing for War Against Russia
Manuel E. Yepe
The Big Lies and the Small Lies
Dave Lindorff
The Push to Make Sanders the Green Party’s Candidate
Robert Fantina
Vice Presidents, Candidates and History
Mel Gurtov
Sanctions and Defiance in North Korea
Howard Lisnoff
Still the Litmus Test of Worth
Dean Baker
Big Business and the Overtime Rule: Irrational Complaints
Ulrich Heyden
Crimea as a Paradise for High-Class Tourism?
Ramzy Baroud
Did the Arabs Betray Palestine? – A Schism between the Ruling Classes and the Wider Society
Halyna Mokrushyna
The War on Ukrainian Scientists
Joseph Natoli
Who’s the Better Neoliberal?
Ron Jacobs
The Battle at Big Brown: Joe Allen’s The Package King
Wahid Azal
Class Struggle and Westoxication in Pahlavi Iran: a Review of the Iranian Series ‘Shahrzad’
Alice Donovan
Cyberwarfare: Challenge of Tomorrow
David Crisp
After All These Years, Newspapers Still Needed
Graham Peebles
Hungry and Frightened: Famine in Ethiopia 2016
Robert Koehler
Opening the Closed Political Culture
Missy Comley Beattie
Waves of Nostalgia
Thomas Knapp
The Problem with Donald Trump’s Version of “America First”
Jeffrey St. Clair
Groove on the Tracks: the Magic Left Hand of Red Garland
Ben Debney
Kush Zombies: QELD’s Hat Tip to Old School Hip Hop
Charles R. Larson
Moby Dick on Steroids?
April 28, 2016
Miguel A. Cruz Díaz
Puerto Rico: a Junta By Any Other Name
Alfredo Lopez
Where the Bern is Fizzling: Why Sanders Can’t Win the Support of People of Color
Peter Linebaugh
The Commons and the Centennial of the Easter Rising
Dan Arel
What Next? Can the #Movement4Bernie Accomplish Anything?
FacebookTwitterGoogle+RedditEmail