May 03, 2012
In reference to the high unemployment rate in Spain the Post told readers:
“The recession also is expected to force down wages and prices and, over time, make Spanish exports more competitive and the country more attractive to investors and tourists.”
Actually there are few, if any, examples of countries where high unemployment led to this process of falling wages and prices that in turn restored competitiveness. Wages tend to be very sticky downward, which is why prices in countries across the euro zone, even those with double-digit unemployment, continue to rise.
It’s also not clear these economies would benefit even if they did have deflation. This would make real interest rates higher (borrowers would have to repay loans in money that is worth more than what they borrowed) and also increase the interest burden for homeowners with mortgages and other debtors.
Many economists have made these points. It is therefore misleading readers to imply that there is a simple story whereby Spain’s high unemployment is a step in a process toward restoring prosperity.
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