The document makes clear that the adjustment approach demanded in particular by European institutions for Greece has largely failed so far, achieving little other than soaring unemployment and a collapse in domestic demand.
According to the authors the main ‘deficit economies’ - namely Ireland, Portugal, Spain and Greece) have seen their current account deficits narrow (the balance of exports to imports). However, and particularly in the case of Greece, this is largely due to a fall in imports due to a collapse in domestic demand rather than an improvement in exports. Indeed the Greek manufacturing sector remains smaller than before the crisis.
As the paper puts it:
“A large share of the decline in current account deficits is related to slumping activity. Thus, progress with respect to reducing external imbalances and rebuilding competitiveness has been associated with large internal imbalances, notably very high unemployment.”In Greece unit labour costs have dropped thanks to large wage cuts. However the huge slump in output means that productivity has actually fallen despite widespread job losses.
Furthermore the analysts conclude that the reduction in labour cost has not led to a significant improvement in competitiveness for Greece’s exports despite the many bold predictions that the opposite would occur. This is in part due to weaker demand in surplus Eurozone countries.
Overall the report makes depressing reading concluding that high levels of unemployment are likely to remain in struggling periphery countries for a very long time. The authors stress that moving forward structural reforms would be more beneficial that further wage cuts.
The report effectively criticizes the approach adopted by the troika and its European institutions and recommends a change in course. In particular many in the German government might do well to pay attention to this line which echoes a sentiment oft repeated by many economists who see the country’s fixation on keeping interest rates low unnecessary protracting the recovery of periphery countries and excerbating trade imbalances:
“Further monetary easing can also play an important role in supporting demand and facilitating internal rebalancing, by boosting demand everywhere, especially in the surplus economies with healthier financial systems, and supporting relative price adjustments, which are easier to obtain with inflation rates close to 2 percent than at the lower levels that are forecast to prevail over the short to medium term.”The authors also recommend initiatives to increase lending to small and medium enterprises (SMEs), completing the process of creating a banking union, and greater fiscal union.
Yet the last, as the authors note, is politically difficult to say the least, even as European officials condemn Greece’s economy to a long depression all while wagging their fingers at Greek workers and ignoring the signs of their own failures.
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