Thursday, October 27, 2011

Greek style austerity is not necessary.




Britain’s former premier, John Major, has a good article in today’s Financial Times. However he makes a mistake when he says in reference to Euro periphery countries, “because they cannot devalue their currency, they must devalue their living standards and promote reforms that enhance efficiency.” Not true!

As I pointed out here, individual Euro countries MOST CERTAINLY CAN to all intents and purposes devalue their currencies: they just need to cut their wages, pensions, etc. And contrary to John Major’s suggestion, this does NOT result in a big drop in living standards because the bulk of the cost of stuff consumed in most countries is the cost of labour in that country.

Moreover (also contrary to John Major’s suggestions) periphery countries DO NOT need to become more efficient. As long as they do a “devaluation / wage cut” of the right amount, they can perfectly well remain inefficient. Indeed I quite like the idea of a variety of different lifestyles and levels of efficiency round Europe. If Greeks and Spaniards want to take three hour lunch breaks, sitting in the sun, that’s fine by me as long as they don’t demand the supposedly high living standards that Northern European enjoy. I say “supposedly” because sitting in the sun is arguably more enjoyable than working in a factory in Northern Europe. Thus it’s a moot point as to who is better off: southern Europeans sitting in the sun or northern Europeans in factories.




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On the opposite page in the FT there is a silly leading article which says in bold print (in the hard copy version) that “The challenge is to encourage cash-rich businesses to invest and employ people”. Luckily for us, most people running businesses have their heads screwed on tighter than FT leading article writers. That is, most businesses “invest and employ” when there is demand for their products, not just because they’ve got cash sitting in the bank.


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