Paul Lachine

Europe’s Inevitable Haircut

The eurozone's crisis countries - Portugal, Ireland, Spain, and Greece - have no currency to devalue to regain competitiveness, so they must devalue internally, through painful wage and budget cuts. But internal devaluation can work only if the value of debts, where it already represents a heavy burden, is reduced.

BERKELEY – What once could be dismissed as simply a Greek crisis, or simply a Greek and Irish crisis, is now clearly a eurozone crisis. Resolving that crisis is both easier and more difficult than is commonly supposed.

The economics is really quite simple. Greece has a budget problem. Ireland has a banking problem. Portugal has a private-debt problem. Spain has a combination of all three. But, while the specifics differ, the implications are the same: all must now endure excruciatingly painful spending cuts.

The standard way to buffer the effects of austerity is to marry domestic cuts to devaluation of the currency. Devaluation renders exports more competitive, thus substituting external demand for the domestic demand that is being compressed.

To continue reading, please log in or enter your email address.

To access our archive, please log in or register now and read two articles from our archive every month for free. For unlimited access to our archive, as well as to the unrivaled analysis of PS On Point, subscribe now.

required

By proceeding, you agree to our Terms of Service and Privacy Policy, which describes the personal data we collect and how we use it.

Log in

http://prosyn.org/Iej8cAJ;

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated cookie policy and privacy policy.