The battle for exports has begun. Compared to the same period in 2008, Q1-Q3 2009 annual hourly labor costs growth are down 4.9% in Lithuania, 0.8% in the U.K., and 0.5% in Estonia. In fact, every country across the 26 countries listed except Belgium, Germany, Greece, and Spain, saw the rate of hourly wage growth decrease since 2008. The currency is pegged, so the only mechanism to increase external competitiveness is through price (wages) declines. To be sure, this growth model cannot work for the Eurozone as a whole.

So, it is conceivable that this race to the bottom will improve the overall trade balance of the EU, but not every country in the world can be a net exporter, can they?

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

Lazy linking fixed.

En un viejo país ineficiente, algo así como España entre dos guerras civiles, poseer una casa y poca hacienda y memoria ninguna. -- Gil de Biedma

Or am I not getting it?

Obviously, all cannot be net exporters within the EU and outside of the EU they have to compete with China, India, the rest of Asia and the USA. If they are net importers and have a balanced fiscal budget their domestic private sector will have to have a negative balance. In time it will go broke or sell itself to outsiders.

This is some of the most insane European policy since WW I when demonstrating "national resolve" led to vast numbers of French and British troops charging futilely across no man's land to be cut down by machine guns, just less obviously so at present at least. And I cannot see how creating an "EMF" so the IMF won't be involved will solve the problem. Insisting on maintaining the GSP will likely lead to massive private sector defaults, including banks, which will cause problems to spread from vulnerable countries to countries with seemingly strong economies.

Else someone please explain where Parenteau's analysis is wrong.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

Germany's structural private sector and current account surpluses make it virtually impossible for its neighbours to eliminate their fiscal deficits, unless the latter are willing to live with lengthy slumps. The problem could be resolved by a eurozone move into external surpluses. I wonder how the eurozone would explain such a policy to its global partners. It might also be resolved by an expansionary monetary policy from the European Central Bank that successfully spurred private spending in the surplus countries and also raised German inflation well above the eurozone average.

You need either a big Euro devaluation or an expansionary German macroeconomic policy.

Want to see the real consequence of smash mouth economics? Forget about Greece and take a look at Latvia. Its 25.5 per cent plunge in GDP over just the past two years (almost 20 per cent in this past year alone) is already the worst two-year drop on record. The country recently reported a 12% decline in annual wages in Q4 2009 versus Q4 2008. The IMF projects another 4 percent drop this year, and predicts that the total loss of output from peak to bottom will reach 30 percent. The magnitude of this loss of output in Latvia is more than that of the U.S. Great Depression downturn of 1929-1933.

Policies and systems built for failure

Mainstream economics insists that one path to full employment is via lower wages. If you want to sell more labor services, lower the price of them, namely wages. This is a classic fallacy of composition argument. What might work for one firm is unlikely to work for all firms. Wage cuts in the aggregate simply destroy aggregate spending power, unless the lost demand is made up for in other ways.

But even though Latvia's external balance is improving (largely through a collapse of imports as a result of the collapse of domestic demand), the country is unable to deploy fiscal policy effectively due to the external constraints of its monetary system, which is predicated on the existence of a currency board system. True, the current account is now turning positive, but to suggest that every single country can "internally deflate" its economy via wage destruction of this magnitude to achieve this state of affairs is another fallacy of composition argument. The whole world cannot run trade surpluses, especially not if policy is designed to destroy demand via massive wage destruction.

More importantly, the very structure of a currency board is wrong. It requires a nation to have sufficient foreign reserves to facilitate 100 per cent convertibility of the monetary base (reserves and cash outstanding). Under this system, the central bank stands by to guarantee this convertibility at a fixed exchange rate against the so-called anchor currency. The government is then fiscally constrained and all spending must be backed by taxation revenue or debt-issuance. Pegging one's currency, then, means that the central bank has to manage interest rates to ensure the parity is maintained and fiscal policy is hamstrung by the currency requirements (which is why organizations like the IMF love them so much; it ties governments' hands). Latvia pegs its currency at 0.71 lat per Euro and joined the ERM in 2005 with the intent of qualifying for the euro zone. It operates a system similar to Argentina in the 1990s which ultimately collapsed and led to its default in 2001 (Argentina pegged against the US dollar).

I think the short term problem is Germany and China (in geographical order) - but the long term one is that there is no popularised model for running balanced trade and having actual growth...

That's the key problem to me...

Deflation is much more painful than devaluation but the impact on comparative competitiveness can be similar.  Countries which habitually inflate also tend to habitually devalue.  The German strategy of export led growth can only be replicated across the Eurozone if the Eurozone, collectively, improves its competitive position Vis a vis the US, China etc.

Globalisation implies that, ultimately, we are all competing with China in productivity, wage rates, "flexibility", workers rights, and perhaps even with human rights, but I remain convinced that long term, good human rights are a prerequisite to ongoing growth and development.

The challenge for Europe is to show that relatively good human rights, workers rights, political democracy, ecological responsibility, gender equality, and income equality are not only compatible with higher aggregate incomes and wealth, but perhaps a prerequisite for them.

Europe arguably has the highest average quality of life in the world today.  To the neo-libs this is a worrying anomaly to be challenged and dissed and propagandised negatively at every opportunity.  Our challenge is to develop an alternative narrative and paradigm which shows that it is in fact the logical outcome of more equal, fairer, and more sustainable policies and systems.

Yes, we are competing with China and the USA.  Just not on their terms.

notes from no w here