June 07, 2012
The Post is one of those papers that doesn’t expect the people who write on economics to have any knowledge of the topic. Hence we have Matt Miller telling us this morning about how resolving the euro zone crisis will require that German Chancellor Angela Merkel devise a plan for “apportioning pain.”
Of course the opposite is true. The pain is wholly unnecessary and self-defeating. The obvious way out of the euro crisis is to require that the European Central Bank abandon its obsession with reinforcing its Maginot Line (its 2.0 percent inflation target) and instead act like a central bank.
This would mean guaranteeing the debt of the crisis countries and supporting a higher inflation rate across the euro zone. The former step would allow the crisis countries to borrow at an affordable rate. The latter step would allow them to regain competitiveness within the euro zone. If Spain and Italy can keep their inflation rates near 1.0 percent, while inflation in Germany and northern Europe runs at a 4-5 percent rate (driven by higher wage growth), then the economies of the peripheral countries will soon be competitive again with Germany and other core countries.
This is the only way to resolve the fundamental problem of the euro zone, which is the lack of competitiveness of the peripheral countries. It does not really require pain, except perhaps from psychopaths who suffer from the thought of prices rising 4-5 percent a year rather than 2.0 percent.
It is also worth noting that Miller wrongly says the crisis countries were profligate. While this may be true of Greece and Portugal, it certainly was not true of Ireland and Spain, both of which were running large budget surpluses prior to the crisis.
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