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A Euro Sabbatical

MUNICH – Under substantial external pressure, the eurozone’s crisis-hit countries are, at long last, bringing themselves to make painful cuts in their government budgets. Salaries are being slashed and public employees sacked to reduce new borrowing to a tolerable level.

And yet, competitiveness in Greece and Portugal, in particular, is not improving. The latest Eurostat figures on the evolution of the price index for self-produced goods (GDP deflator) show no tendency whatsoever in the crisis-stricken countries towards real devaluation. But real devaluation, achieved by lowering prices vis-à-vis their eurozone competitors, is the only way to re-establish these countries’ competitiveness. A reduction in unit labor costs can also increase competitiveness only to the extent that it actually results in price reductions.