The Corner

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European Stability Mechanism?


Open Europe has a new research piece out on how just how much more “internal devaluation”  will be required of the PIIGS if they are to restore labor competitiveness  (for now) with Germany, the pace-setter in the single currency union.

The nub:

Spain, Italy and Ireland, in particular, can still in theory achieve the internal devaluation needed to become reasonably competitive with Germany. By 2011 Spain had achieved over 50% of its scheduled internal devaluation, while Ireland has managed over 80% and Italy has to reduce its labour costs by another 10% (although it is yet to put the policies in place to do so). However, Portugal is a borderline case (having achieved 40% of its scheduled adjustment) as, along with Greece, it is unclear whether it will be able to make the necessary cost reductions needed.

Count me skeptical as to whether the PIIGS can starve their way back to prosperity. Export-oriented Ireland, like the Balts cited in the Open Europe report (FWIW, I have a piece on the Estonian case in the new NRODT) is the exception, not the rule.

To give an idea of the scale of what is required:

To illustrate the political challenge at hand: a 17% contraction in Greek real GDP by 2013 (expected by the IMF) puts Greece back to 2002, meaning that Greek GDP per capita will have fallen from over €16,000 in 2007/8 to under €13,000. Similarly, a 20% reduction in the Portuguese economy would take it back below its 1995 level of output, a reversal of 17 years – almost an entire generation lost. 

The question is whether the PIIGS’ populations will be willing and able to accept such rapid adjustments. There is no way to say for sure when the political limit for cuts and austerity will be reached. However, protests on the streets of Athens and Lisbon, and widespread discontent in Spain illustrate that limit may not be far away.

From the New York Times:

If Greece were to hold new elections soon, [the neo-Nazi-ish] Golden Dawn could emerge as the third-largest party in Parliament, behind Mr. Samaras’s New Democracy and the left-wing Syriza. Currently, Golden Dawn is the fifth largest, with 18 out of 300 seats.

“We have a major socioeconomic crisis in which several hundred thousand Greeks are losing ground,” said Nikos Demertzis, a professor of political sociology at the University of Athens. “And you have a rising number of immigrants in Greece, many illegal. This is creating a volcanic situation where all the classic parameters for the flourishing of a far-right force like Golden Dawn are present.” . . .

“It’s the current government that brought more power to Golden Dawn because the people are angry at what the government is doing,” said Iakovos Zorzios, 73, a retiree whose pension has been cut as part of Greece’s austerity measures.

“How can we not be angry when the government cuts our earnings so much?” said Mr. Zorzios, who is bracing for yet another reduction in the latest austerity plan forged this week. “How can they expect us not to support Golden Dawn?”

And the oligarchs of Brussels still claim that their wretched single currency is what stands between Europe and a return to the worst of its past. Amazing.