Saturday, August 13, 2011

In a fiscally united Europe, would core countries subsidise the periphery?

Philip Pilkington (PP), a journalist and writer based in Dublin, has an article on the Naked Capitalism site attacking Otmar Issing (former member of the ECB’s executive board.). As far as I’m concerned it’s game, set and match to Otmar Issing.

PP tries to argue that the core does not subsidise the periphery.

To back his point PP implores us to take a “proper macroeconomic perspective”. OK by me. Unfortunately his article contains far more blarney than macroeconomics.

PP’s main point (towards the end of the article) is that Germans are privileged to be able to sell stuff to Ireland, Greece, etc because it keeps Germans employed. And without such a market, Germans would have to go for greater internal consumption in Germany, i.e. run a larger deficit. And Germans abhor deficits because of the Weimar episode.

The answer to the latter point is that if Germans have the same blinkered attitude to deficits as currently exists in Congress, then Germans (like members of Congress) need to study economics. Having done that, they’d have no problem at all doing without Greeks, the Irish or other periphery states.

But arising from the latter argument, there is the question, given a true fiscal union in Europe, of whether relatively high unemployment in periphery, core taxpayers would in effect be subsidising the periphery. Well it’s pretty obvious they would. And the solution to this problem would be, as it is now, to make the periphery more competitive: i.e. cut real wages in the periphery. That way, unemployment levels would be more or less the same in every country, thus no country would subsidies another.


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