Fixing Europe's Financial Mess With Two Simple Measures

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Michael Pettis has an article on Spain's financial difficulties explaining why no set of conventional measures can keep Spain indefinitely within the Eurozone.

Alternatives to the conventional measures exist, Pettis acknowledges, but considers these "too unlikely to consider."

On the contrary, I believe some alternatives are very "likely" to be workable, although given the blinkered view of those who advise governments, the likelihood of their ever attaining the attention of policy makers may indeed be small.

In particular, I believe it would be possible, relatively simple, and politically feasible to construct a mechanism that could adjust for differences in productivity among the Eurozone nations: for example, by adjusting all wages on a yearly or quarterly basis according to the national or regional unemployment rate.

President Hollande of France has taken what could be a step in this direction by cutting cabinet salaries by 30%. Now if this were to be applied across the board, France would, at a stroke, be largely free of her economic difficulties. The cost of living would fall, unemployment, and with it the cost of welfare programs, would fall, the government deficit would fall, while international competitiveness would increase.

Add to an automatic wage rate adjustment mechanism, a wage subsidy program, which avoids the problems associated with a negative income tax, and full employment could be restored, while the small and medium enterprise sector would have the benefit of a level, or more nearly level, global playing field, so far as labor costs are concerned.

Together these measures should initiate a virtuous cycle of rising output and declining costs able to restore Europe to prosperity without importing millions from the third world to provide cheap labor for jobs "Europeans won't do."