Friday, April 13, 2012

Austerity

Spain has a problem. It imports more stuff than it exports and is having trouble paying its bills. Its wages and prices are too high for its productivity. Brussels prescribes austerity, which is supposed to force down wages and prices of Spanish production.

Perhaps it eventually might,but in the meantime employment has collapsed - half of workers under twenty-five are unemployed - and the economy is collapsing. As Paul Krugman frequently tells us, wages and prices are sticky.

If Spain had its own currency, it would devalue the peseta, and everyone would be poorer, but the economy would be far better off. The hazards of the Euro trap were correctly understood by many economist from the beginning, but they were ignored. Probably this is an example of the kind of self-delusion in human affairs that I have argued about in the past.

The central tragedy is that the collapse of the economy leaves the country less and less able to pay.

Can Europe afford to bail out Spain? Will it try? Even if it does, will Italy then be next?

Will a miracle intervene and start the European economy growing again, and if so, enough to help?

The architects of the Euro created an attractive nuisance - the economic equivalent of an unfenced swimming pool. Its attractions sucked many in. Now what?