Monday, April 11, 2011

The Euro (Again): Krugman Gets It

Paul Krugman posted yesterday a well-known chart showing unit labor costs divergence in the eurozone from the start (1999=100), here .

I could not agree more: See my March 8, 2010 post  The Nature of the Euro: A Public Choice Perspective  in which I quote the Roubini et al. paper that previously presented this chart of real effective exchange rate divergence within the eurozone: “Real Exchange Rate Movements and Endogenous OCA Analysis: Lessons from the Euro Area for Asia”. 

I also concur with Krugman's conclusion: “the ECB is in effect demanding that all the removal of that competitiveness gap take place via deflation in the south, none of it through inflation in Germany.”

The question then is: for how long can such a disequilibrium persist? The late George Stigler had a saying: “it is a quite general rule that intolerable things are not tolerated.” (Do Economists Matter? Southern Economic Journal, January 1976). This is the topic of my forthcoming book about the euro (in French).

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