Formally, as we all know, it is not correct to state that Portugal’s slow growth since the early 1990s is due to the euro. The euro comes into the picture only because it impeded the government to devaluate in order to re-establish losses in factor competitiveness. But slow growth was due to those losses. Recognizing that is not arguing that a non-euro counterfactual would be better. As Rui belw recalls, devaluation in small countries leads only – if at all – to short-term gains.
Nobody is seriously considering that living the euro is a true political option. It is not, I hope, and I hope that it stays a non-option for a long time to come.
But we are facing a problem of imbalances within the euro and next steps are to figure out how to deal with it. Paradoxically, as Francesco recalls, Germany is both at the centre of the solution – because of its positive external balances –, and well acquainted with the problem. In fact, the 1990 unification was soon followed by the unification of the Deutschmark which imposed an overvalued currency in the Eastern lander. Wage gaps – and labour productivity gaps – are still wide, despite massive financial transfers from the West to the East, equivalent to 3% of the West’s GDP, each year.
The bottom line is: macroeconomic adjustments take tame (“Supply is a long run stuff”, as Francesco put it), and present day international financial imbalances have to be taken care of without impacting too much on the needed macro adjustments. How to deal with that? The instruments are out there, and we just need the appropriate political framework.
Our task in this small peripheral country is to be conscientious about the problem. And some progress has been made. A couple of months ago most economists blamed the lack of “structural reforms”, but now things are a bit different and we are looking at the way the euro zone is working. But the hardest task is to convince the German voter that they have to pay back some of the benefits that they got from the euro. Maybe that is impossible.
We may also hope that while we discuss these issues, growth will return, and that part of the imbalances will be cured automatically. Hope may not however be the best tool to deal with economic troubles, as Miguel argued a few posts below.