{"id":271643,"date":"2010-02-03T11:41:07","date_gmt":"2010-02-03T16:41:07","guid":{"rendered":"http:\/\/blogs.wsj.com\/economics\/2010\/02\/03\/euro-rules-take-bite-out-of-peripheral-countries\/"},"modified":"2010-02-03T11:41:07","modified_gmt":"2010-02-03T16:41:07","slug":"euro-rules-take-bite-out-of-peripheral-countries","status":"publish","type":"post","link":"https:\/\/mereja.media\/index\/271643","title":{"rendered":"Euro Rules Take Bite Out of Peripheral Countries"},"content":{"rendered":"

Internal devaluation may sound like something you talk to your therapist about, but it\u0092s serious business for Latvia, according to a paper<\/a> from the Washington-based Center for Economic and Policy Research<\/strong>.<\/p>\n

And it could be a major problem for countries in the euro zone, too, one of the authors says.<\/p>\n

Latvia, economists Mark Weisbrot<\/strong> and Rebecca Ray<\/strong> note, \u0093has seen a world-historical drop in GDP of more than 25%.\u0094 With another 4% decline expected this year, its output loss will be even greater than the Great Depression. A \u0093large\u0094 reason, the authors say, is an overvalued fixed exchange rate the country maintains in the hopes of being able to join the euro.<\/p>\n

\u0093With the nominal exchange rate fixed, the adjustment in the real exchange rate takes place through pushing down prices and wages,\u0094 they wrote.<\/p>\n

The end result? \u0093The economy is trapped in a deep recession in which all of the major macroeconomic policy variables — the exchange rate, fiscal policy, and monetary policy — are either pro-cyclical or cannot be utilized to help stimulate the economy. This makes it very difficult to get out of the recession,\u0094 they wrote.<\/p>\n

Internal devaluation has become something of a buzzword in other parts of Europe, too. And though its effects aren\u0092t nearly as extreme as in Latvia, it could weigh heavily on peripheral euro-zone countries like Portugal, Ireland, Greece and Spain. Ireland is already going through a process of \u0093internal devaluation,\u0094 note economists at BNP Paribas<\/strong>, in which fiscal tightening coincides with a period of very low inflation or even outright deflation.<\/p>\n

The euro zone\u0092s periphery — or PIGS as they\u0092re known — were hit hard by the collapse of the housing bubble, and their deficits have ballooned as a result (Ireland, Greece and Spain are all in double digits as a percentage of GDP; Portugal is nearly there). At the same time, they face major competitiveness challenges after years of wage and price increases and lagging productivity.<\/p>\n

The easy route — currency devaluation — isn\u0092t available, since all four are part of the euro, which despite its recent losses remains very high historically. Another, monetary expansion, isn\u0092t either since interest rates are set by the ECB. Neither is fiscal policy, since euro zone countries are bound to strict budget rules. That leaves internal devaluation in the form of wage cuts, government spending reductions and a lengthy period of either very low inflation or outright deflation.<\/p>\n

It\u0092s painful, though at the end of the process countries like Spain, Ireland and Greece should be more competitive and able to achieve sustainable growth. Still, while they aren\u0092t likely to become larger versions of Latvia, internal devaluation suggests years of sub-par growth in those once fast-growing peripherals that used to drive demand in Europe as a whole.<\/p>\n

The euro zone\u0092s periphery \u0093is analgous\u0094 to what\u0092s going on in Latvia, Mr. Weisbrot told the Journal. And the lesson for Latvia, he says, is that the problem doesn\u0092t go away if and when they join the euro.<\/p>\n

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Internal devaluation may sound like something you talk to your therapist about, but it\u0092s serious business for Latvia, according to a paper from the Washington-based Center for Economic and Policy Research. And it could be a major problem for countries in the euro zone, too, one of the authors says. Latvia, economists Mark Weisbrot and […]<\/p>\n","protected":false},"author":850,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[7],"tags":[],"class_list":["post-271643","post","type-post","status-publish","format-standard","hentry","category-news"],"_links":{"self":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/271643","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/users\/850"}],"replies":[{"embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/comments?post=271643"}],"version-history":[{"count":0,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/posts\/271643\/revisions"}],"wp:attachment":[{"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/media?parent=271643"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/categories?post=271643"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/mereja.media\/index\/wp-json\/wp\/v2\/tags?post=271643"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}