Faculdade de Economia da Universidade de Coimbra, wednesday 23 February 2011: João Ferreira do Amaral and Miguel Beleza shared their views on the Portuguese performance under the euro, in another event of the project "1986-2010 A Economia Portuguesa na União Europeia".
João Ferreira do Amaral's main thesis was the following. 1) Adoption of the euro led to a systematic bias in the allocation of resources from tradable goods sectors to non-tradable goods sectors; 2) the only way to possibly avoid such bias (and, thus, to prevent the current foreign debt crisis) would have been to devalue the national currency.
True; if (and only if) Portugal merely aims at avoiding foreign debt crisis. But I always thought we wanted to improve our real per capita income (in purchasing power parity, obviously).
Think about the crawling-peg 1976-1990. It was instrumental to rebalance our payments balance. To the cost of postponing structural change in our tradable goods sectors. See where that led us: low structural competitiveness and... a foreign debt crisis.
It is simply too hard to believe in an exchange-rate devaluation policy as a means to promote a positive structural productive change.
I thought we all believed that monetary policy is ineffective in the long-run.
Correction: monetary policy may effectively destroy the stability conditions that a healthy growth process requires. Thank you, Miguel Beleza, for reminding that to last wednesday's audience (those with hears will have heard).
If only fiscal policy had countered the aggregate demand expansion that we all knew would arise after adopting the euro... we wouldn't have the twin deficits crisis that we do have (yes, please do not forget that the public deficit is at the center of the problem).
Healthy fiscal policies would have structurally balanced the budget and, also crucial, would have given private economic agents the proper message and incentives on their inter-temporal budget constraints. That could avoid the twin deficits-debts crisis.
I fear that a corollary that some may extract from João Ferreira do Amaral's thesis is that we are, after all, devaluing our wages, which is the macro equivalent to an exchange-rate devaluation.
Well, not quite the micro equivalent, though (and, thus, not quite the macro equivalent). What is necessary and should be done is to devalue the wages in the sectors and firms that are not achieving high enough productivity growth. An exchange-rate devaluation devalues all the wages in the economy. I fail to see the point in doing that, if we want to stimulate structural change.
Last wednesday's audience was largely composed of students that were born after the end of the crawling-peg, after the creation of the single market and who do not have any recollection of the pre-euro years. If only they had experienced life in a highly protected domestic market, with a chronic devaluation of their international purchasing power, with high and volatile inflation...
The best way to repeat an error is to forget about its consequences when we last did it. Hence the importance of good pedagogy in explaining the current crisis and its possible solutions. Thank you, Miguel Beleza.