Why don’t PIGs devalue their currencies?

There is a way that European periphery countries could solve their problems in 24 hours – at least in principle. And that is to organise a substantial and instantaneous cut in ALL wages. This would amount to a devaluation of their currencies. Indeed this is the ultimate objective of the long drawn out and extremely painful deflation currently being imposed on these countries.

A wage cut of X% in a given country would not of course cut living standards by anywhere near X% for the simple reason that the cost of goods and services in each country is made up mainly of the cost of local labour needed to make and get those goods and services to market. And this simple point would have to be drilled into the heads of the population before proceeding with this “wage cut / devaluation” policy.

There are of course HUGE political difficulties in organising an instant all round cut in wages. That is, as suggested just above, the local population would be up in arms. Thus a large and expensive advertising campaign would be needed to teach the local population some basic economics.

And there is the knotty problem as to how far employers could cut their own “wages” (i.e. profits) at the same time. But one answer to this is to include in the above campaign something to the effect that “If you don’t like the profit that employers are making, don’t just sit there complaining: become an employer. Set up your own business.”

The costs of the above campaign would be huge. But the costs of the existing “deflation lasting several years” policy is HUGE as well.

Moreover, once the rationale of the “instant wage cut / devaluation” policy became widely understood throughout Europe, future problems deriving from lack of competitiveness of individual countries would be much easier to deal with.

Of course lack of competitiveness is not the only PIG problem: debts are a problem as well. But any bank or creditor is happy to lend to someone in debt as long as the debtor is competitive and is earning money.

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Afterthought (28^th Sept 2011). A way of persuading PIG citizens of the merits of the above type of “fast devaluation” would be something along the following lines.

Look at the UK. It devalued its currency by about 25% in 2008. Nine out of ten UK citizens had no idea at the time that this was happening. There was no dramatic effect on living standards. The whole episode was one huge non-event.

 

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