The eurozone crisis countries still have not developed a workable strategy for countering the policies being imposed by the troika – the European Central Bank (ECB), the IMF and the European Union. Their main problem is not profligate government spending, as fans of data everywhere have long known; the problem is an imbalance in relative prices between the crisis countries and Germany and other northern countries.
This imbalance is causing the crisis countries to run chronic trade deficits. Prior to the collapse of housing bubbles in the peripheral countries, this deficit was financed primarily through massive lending to the private sector in the crisis countries by banks in the northern countries. Since the collapse, the trade deficit has been largely financed with official lending to peripheral country governments. However, the core problem is the trade deficit, not government borrowing in the crisis countries.
Prior to the creation of the euro, this problem of competitiveness would be easily addressed by a fall in the value of the currencies of the peripheral countries relative to the currencies of the core countries. However with the single currency, this is not an option.
Resolving the imbalance
The easiest path to resolving the imbalance in the context of a single currency would be to have Germany and other core countries experience a more rapid rate of inflation (for example, 4-5 per cent) so that the peripheral countries could regain competitiveness with a low positive inflation rate. Unfortunately, this path also is apparently not an option.
All the major political parties in Germany resist a higher inflation rate with the same vehemence as fundamentalist Christians in the United States resist the theory of evolution. Their view of the danger of moderate rates of inflation will not be changed by evidence. Just as fundamentalist Christians were brought up with their beliefs about creationism, the economists and policy makers calling the shots at the ECB had their views about inflation instilled in them at an early age. They are not going to budge.
Given the intransigence from the ECB on promoting a higher rate of inflation in the core countries as a way to redress the problem of competitiveness of the crisis countries, the logical course for the crisis countries would be to leave the euro. However for a variety of reasons, few people and even fewer politicians in the peripheral countries appear willing to go the route of a euro exit.
This means that there is no alternative to the route chosen by the troika of “internal devaluation”. The peripheral countries should recognise this basic reality if they reject the route of euro exit. There is no other option on the table. Given the ECB’s policy on inflation, internal devaluation is the only possible way to ever resolve the crisis. That is not an arguable proposition, it is arithmetic.
However the crisis countries can make the arithmetic less painful. While the troika envisions that most of the pain will be borne by workers taking reduced pay and benefits, creative policy can direct the pain elsewhere.
An obvious place to start would be to force property owners to take a hit by accepting lower rents for their houses and apartments. This can be easily done with a vacant property tax. If a modest tax (eg 1.0 per cent of value) were imposed on properties that were vacant for more than three months, it would give property owners a substantial incentive to sell or rent out empty properties. Given the large number of vacant properties in many countries, this could lead to large declines in rent.
Combatting the troika
That in turn would mean increases in real wages. In most countries actual rent, or the implicit rent on owner occupied housing, is close to 30 per cent of consumption expenditures. Rent is often 40 per cent or more of the expenditures of lower paid workers. If this policy could lower rents by 10 per cent, it would imply an increase in the real wage of an average worker of around 3 per cent and possibly more than 4 per cent for lower paid workers. This should be a substantial buffer to the pain of internal devaluation.
Another route that the crisis countries could follow is to try to find creative ways to reduce payments for patent and copyright fees. These archaic property forms are an enormous drag on the economy and transfer huge sums from consumers to holders of intellectual property claims, most of whom will be foreigners.
There are vast amounts of money at stake here. For example, Spain spends roughly 1.5 per cent of its GDP on prescription drugs. If drugs were sold in a free market without patent monopolies, it would spend about one-fifth as much. There is potential for huge savings in many other areas as well, such as computer software (both business and consumer), recorded music and video material, and even seeds for food crops.
The crisis countries are required by various treaties to enforce patent and copyright monopolies, but they can push these agreements to the limit, allowing for as much market competition as possible. They can also make the protection of intellectual property a low priority for law enforcement, for example by putting it behind tax evasion and financial sector fraud.
There are other, and possibly better, ways to tilt the market to produce more favourable outcomes for workers in the crisis countries. However, progressives need to be looking in this direction if they are serious about combatting the troika.
The right has been using the levers of the market to redistribute income upward for the last 30 years. If progressives are too lazy to think of ways to rig the market to produce more equal distributions, then they will be losing for the next three decades as well.
Dean Baker is a US macroeconomist and co-founder of the Centre for Economic and Policy Research.