Raul Elizalde - May 3, 2012
The following letter was published in the Financial Times on May 3, 2012:
From Mr Raul Elizalde.
Sir, Gideon Rachman (“There is no alternative to austerity”, May 1) declares that “calls for Europe to spend its way out of debt are an illusion”. Maybe so, but then his prescription for labour market reform as “the only long term route to stronger job creation” is strictly a hallucination. He surely cannot ignore the political hurdles that 25 per cent unemployment in Greece or 50 per cent among youth in Spain poses to implementing the austerity and reforms he demands. The more serious mistake he makes, however, is to succumb to the notion that the central choice is between firing public workers and building unneeded railroads with borrowed money.
By now it should be clear that the real issue is not austerity versus growth. It is that the periphery is exceedingly uncompetitive relative to the core. This imbalance needs to be measured and corrected in relative terms. But this task has been rendered impossible because the European core insists in moving the goalposts out of the periphery’s reach. The folly of the fiscal compact is to demand that all countries, including the core, bring their budgets to balance and take measures to “foster competitiveness”. There is no imaginable way for Greece, Spain or Portugal to adjust against Germany if Germany is also intent on improving its competitiveness against the periphery. Germany will easily win that contest, and the eurozone will lose.
It’s time to recognise that Germany reaped enormous gains from the creation of the common currency. If it is really committed to the eurozone’s survival, it will have to give back some of those gains, not only by providing bailout money or booking private sector losses, as it is doing, but also by surrendering some of its relative competitiveness. The most direct way is by running a higher inflation than the periphery.
I admit that this may also look like hallucination, since the Bundesbank is unlikely ever to contemplate such a policy from the monetary side. However, recent German unions’ demands for higher wages present just the right opportunity. Conceding higher pay could ease some builtup political pressures brought about by austerity, reward the long contribution to competitiveness made by German workers, and make the periphery’s relative adjustment easier to achieve. This is the kind of commitment that keeping the eurozone together takes. Yes, the periphery should adjust. But it’s up to Germany to let it do so.
Raul Elizalde, Path Financial, Sarasota, FL, US
From Mr Raul Elizalde.
Sir, Gideon Rachman (“There is no alternative to austerity”, May 1) declares that “calls for Europe to spend its way out of debt are an illusion”. Maybe so, but then his prescription for labour market reform as “the only long term route to stronger job creation” is strictly a hallucination. He surely cannot ignore the political hurdles that 25 per cent unemployment in Greece or 50 per cent among youth in Spain poses to implementing the austerity and reforms he demands. The more serious mistake he makes, however, is to succumb to the notion that the central choice is between firing public workers and building unneeded railroads with borrowed money.
By now it should be clear that the real issue is not austerity versus growth. It is that the periphery is exceedingly uncompetitive relative to the core. This imbalance needs to be measured and corrected in relative terms. But this task has been rendered impossible because the European core insists in moving the goalposts out of the periphery’s reach. The folly of the fiscal compact is to demand that all countries, including the core, bring their budgets to balance and take measures to “foster competitiveness”. There is no imaginable way for Greece, Spain or Portugal to adjust against Germany if Germany is also intent on improving its competitiveness against the periphery. Germany will easily win that contest, and the eurozone will lose.
It’s time to recognise that Germany reaped enormous gains from the creation of the common currency. If it is really committed to the eurozone’s survival, it will have to give back some of those gains, not only by providing bailout money or booking private sector losses, as it is doing, but also by surrendering some of its relative competitiveness. The most direct way is by running a higher inflation than the periphery.
I admit that this may also look like hallucination, since the Bundesbank is unlikely ever to contemplate such a policy from the monetary side. However, recent German unions’ demands for higher wages present just the right opportunity. Conceding higher pay could ease some builtup political pressures brought about by austerity, reward the long contribution to competitiveness made by German workers, and make the periphery’s relative adjustment easier to achieve. This is the kind of commitment that keeping the eurozone together takes. Yes, the periphery should adjust. But it’s up to Germany to let it do so.
Raul Elizalde, Path Financial, Sarasota, FL, US
Raul Elizalde | raul@pathfinancial.net
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