Sunday, December 11, 2011

Is the Euro the Problem?

What's wrong in Europe?

Krugman is saying, again, that it's the inability to adjust exchange rates. He quotes Kevin O'Rourke:

The world nowadays looks very much like the theoretical world that economists have traditionally used to examine the costs and benefits of monetary unions. The eurozone members’ loss of ability to devalue their exchange rates is a major cost. Governments’ efforts to promote wage cuts, or to engineer them by driving their countries into recession, cannot substitute for exchange-rate devaluation. Placing the entire burden of adjustment on deficit countries is a recipe for disaster.
 In other words, it's a problem of relative prices. Wages are too high in Greece, Spain and Ireland, so those countries face unemployment; wages are too high in Germany, so it's experiencing an inflationary boom; and wages are just right in France, so it's chugging along at full capacity.

Wait, what?

Of course that's not what's going on at all.
There are a lot of ways not to talk about aggregate demand.

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