Trawling the web, we came across a December 2012 Zero Hedge article by Tyler Durden (who appears to exist as a nom de plume) which neatly summarizes the crisis increasingly facing the Eurozone because of an inflexible currency that benefits Germany while causing pain elsewhere in the zone. They cannot devalue out of depression, external devaluation is impossible, so the only option is internal devaluation: lower wages and less employment. Here’s an extract from the article, together with a self-explanatory graph:
Most European countries (including France) face a desperate need for external devaluation, which is impossible under a monetary union, leaving only internal devaluation as an option. This is where the much maligned concept of austerity comes in: from a macroeconomic perspective, austerity is not so much an exercise at moderating the pace of debt increase (as neither Spain nor Italy have reduced their rate of debt issuance), but of gradually becoming more price competitive with Germany: a key outcome that will be needed for the Eurozone to have any chance of survival, i.e., lowering sticky unemployment rates from levels that virtually assure social “disturbances” in the months and years ahead.
And herein lies the rub: because while protests against “austerity” (which as we observed recently has still not been truly implemented in Europe, and certainly not in Portugal or Spain) are a daily event in most PIIGS nations, “you ain’t seen nothing yet.“ The reason: to achieve the unavoidable macroeconomic rebalancing, and to collapse the spread between soaring labour costs in the periphery and those of Germany (see chart below), the bulk of European countries will need to see wages collapse by anywhere between 30% and 50% to compensate for the lack of state-level currency devaluation optionality. And yes, this includes France.
Yet telling a continent, which in its desperation is hopeful and confident that the worst is behind it (as its lying politicians take every opportunity to note) that the most acute of standard of living collapses is yet to come, is borderline cruel and unusual. So we will just keep our mouths shut and let Europe’s politicians bring this depressing message to their people. We are confident the reaction will be more than dignified.
As we watch the machinations of the EU in the news, and when we watch YouTube clips of UKIP MEPs holding the mirror up to the sneering Schultz and arrogant Barroso, we see the drama playing out. From time to time there are riots in the southern Europe as the crisis gets worse. What these people have not done is to admit that their “project” is a massive scam to transfer wealth from the poor to the rich.
On Tuesday, however, there seemed to be a change of heart. Nearly two weeks ago Viviane Reding came clean on the aim of the EU as a whole, to move to a United States of Europe, but now we have László Andor, Commissioner for Employment, Social Affairs and Inclusion discussing the “Employment and Social Developments: Annual Review highlights need to address risks of in-work poverty” in a press release:
The still growing macroeconomic, employment and social divergences threaten the core objectives of the EU as set out in the Treaties, namely to benefit all its members by promoting economic convergence and to improve the lives of citizens in the Member States. The latest review shows how the seeds of the current divergence were already sown in the early years of the euro, as unbalanced growth in some Member States, based on accumulating debt fuelled by low interest rates and strong capital inflows, was often associated with disappointing productivity developments and competitiveness issues.
In the absence of the currency devaluation option, euro area countries attempting to regain cost competitiveness have to rely on internal devaluation (wage and price containment). This policy, however, has its limitations and downsides not least in terms of increased unemployment and social hardship, and its effectiveness depends on many factors such as the openness of the economy, the strength of external demand, and the presence of policies and investments enhancing non-cost competitiveness.
There you have it, from the horse’s mouth, the truth. Put this together with Reding’s call to USofE arms for the May elections, and it is quite clear where they are going.
Of course, in Britain we are not immune. We are increasingly becoming the destination of choice for Europeans who cannot find well paid work in their own countries. Even those with degrees flock to Britain to take up minimum wage jobs as Costa coffee makers or Asda delivery drivers and those with lesser skills go for things like Big Issue vending. Add to that our attractive in-work benefits and free healthcare systems and it is a no-brainer for those who can be mobile.
We know that UKIP will score highly in the European elections in May, although we will have to fight to beat Labour to first place, but what will be really interesting once the fat lady sings will be the rise of Eurosceptic parties across Europe.