One of my frustrations with the press comes from having to read a large number of news articles to find out the underlying causes of political and economic phenomena. Fundamentals are rarely addressed. Sometimes talented bloggers provide translations of articles that are written within politically correct mental strait jackets. But more often one has to just plow thru enormous numbers of articles to get to the core of a problem. Well, reading thru Op-Ed pieces in the New York Times I came across a short piece by U Maryland economist Gayle Allard who explains a core problem with Spain's economy as a member of the Euro: The country needs periodic bouts of inflation to undo the distortions caused by very powerful unions. This makes Spain's entry into the euro zone an act of enormous political folly for all involved.
While it was doing its fiscal homework, however, Spain overlooked a key requirement for the currency area: staying competitive without a national exchange rate. Spanish labor costs chronically rise much faster than productivity.
Read this and marvel at the absolute madness of adding the southern European countries to the euro zone. Yet a large number of politicians in Europe joined together to implement this madness.
In the past, the government periodically devalued the peseta to restore competitiveness. The euro took this escape valve away, but policymakers neglected the structural reforms that could help Spain compete without an exchange rate.
Spain’s key problem lies in its labor market. Collective bargaining is politicized and far from the realities of the firm. Unemployment benefits are high and easily collected, giving Spaniards incentives not to work and pushing market wages higher. High dismissal costs protect an “aristocracy” of workers from firing, making them immune to pressures to restrain their wages or boost their productivity.
Spain needs bouts of inflation as long as collective bargaining remains highly politicized. A country that needs periodic bouts of inflation should not share a currency with Germany. One doesn't need to be a rocket scientist running complex computer models to figure that out.
What is the most remarkable thing about the current European financial crisis? It was set in motion by the criteria used for choosing euro zone members. The steps that led into the crisis were obviously wrong to anyone who understood the distortions in the labor markets in southern Europe.
Think the Spanish government can fix Spain's economy? To do that involves taking on a huge system of job entitlements. Probably too many voters are in on the game for an elected government to undo it.
Overpaid American public sector workers are like most of Spain's economy. Imagine how much more messed up the United States would be if our problems with government worker unions extended into the entire economy. Overpaid public sector workers in the US are going to end up forcing some governments into bankruptcy.
|Share |||By Randall Parker at 2010 May 13 10:11 PM Economics Sovereign Crises|