until costs have fallen enough relative to the rest of Europe
to achieve the needed gain in competitiveness"
pk
here's an equivalent "truth"
to lower unemployment we need more jobs at corporations
too replace domestic demand for domestic outputs
you can either
I ) fund other domestic demand for the same outputs
or
II) find foreign demand of an equivalent size for those same domestic outputs
PK is saying Spain can't follow route I
why ?
let assume away the lack of any ability to self finance
the ECB is no FED for Spain
still
the import surge that would be a byproduct
of getting there ie back to full ouput domestically
by means of increased domestic effective demand
ie thru a hyped up transfer payment plan
would wildly increase the balance of payments deficit
that undergirds the banking crisis
so we assume away that problem
by assuming an ability to self finance
and we restore that barrier toa domestic route to recovery
by dropping that same fanciful assumption
and end up facing the fact
Spain is much much more a california then a canada
but increase exports ?
no ability to devalue unilaterally
the euro is a joint currency
no ability to get other zone members
to accelerate their income expansion rate
and thus as part of that expansion
accelerate their imports from ...spain
simply reducing imports by reducing domestic income
might balance payments
but the real "task " is reducing relative costs of production
which in the end means reduce relative wages
if nominal wages resist downward pressure
ie the shrinking "corporate wage fund "
simply sheds job hours not lowers wage rates
as aggregate effective nominal domestic demand shrinks
during this induced stagnation and ultra slow contraction
dynamic adjustments continue but they are ultra slow grinding adjustments
like defaults...defaults held in suspension by banks living on
what in one direction..further grinding are probably
too often illusory assets
at any rate look here
Spain is increasing taxes while reducing spending
precisely to reduce imports and increase downward pressure on domestic wages
see Spain today at point or better range A
where unemployment is high enough to stop aggregate nominal wage rate increases
to get an export kick as well as further import reduction
however Spain today needs
to move to unemployment range B where wage rates are actually falling
why ?
so the BOP gap closes fast enough to avoid a finacial crisis
ie a point where Spain can't support its total external debt load public and private
a better notion of wage change here might be
the ratio of German wage rates to Spanish wage rates
but that highlites an alternative zonal solution
a wage boom in Germany !
combined with a euro deval against its eastern EU partners
and EZ tradering partners even further east and south east
