Monday 17 September 2012

Thou Shalt Not Beggar Thy Neighbour

Suppose that the proposed changes in the Social Security Contribution are a success, namely, that prices go down, investment goes up, unemployment goes down and global external competitiveness increases, all by large margins. Portugal would provide a new view for economic policy for the whole world, and fully confirm the theoretical approaches developed in the last decade or so. We would have visits from economists and politicians to study locally the phenomenon. But... If that happens, what would stop Spain from taking the same measure? And then France, and then Italy... Maybe the final outcome would be some sort of European wage union, replicating the euro, which was created, among other things, to stop competitive devaluations... The fact that no one is really worried about this form of competitive devaluation, however, may be a good indicator of its potential.


  1. Pedro. Could it be that you have not been attentive and that there are persons/institutions/governments that were worried/interested with this form of fiscal devaluation?

  2. Dear Francesco, Of course there are and I think that this discussion is very relevant indeed (although I am concerned with the emphasis in labor productivity instead of TFP). I would like to know, thought, whether there are worries within EU institutions about this form of competitive devaluations. Best, P

  3. to my understanding there is interest.
    A recent debate was at the EC Tax Forum in march. At least one session was on this topic.

    You do not have to see it only as a way to beggar thy neighbor but also as a policy for "realignments". This was also the case of previous exchange rate devaluations-realignments within the EMS: most of them, of not all of them, were not taken to beggar their neighbor (actually they required unanimity) but to readjust to cost misalignments.

    In our blog there was an entry (the one cited by the Economist) on this:

  4. Hi,

    What theoretical studies do you refer to? Could you link me to those? I have been reading high profile economists saying austerity wont work.