Euro: Breaking Up Isn’t Easy

The internal tensions tearing the euro apart are only going to increase.  The structural overvaluation of Italian and Spanish ‘real exchange rates’ is simply a restatement of the undervaluation of Germany’s. The 20-30% competitiveness Spain, Italy, and Greece lost against Germany is not going to be addressed by austerity. It’s taken nine years of stagnation in real consumer spending – and feeble growth – to achieve this cost competitiveness in Germany.  For Italy and Spain to regain competitiveness requires wages there to rise more slowly than German ones, or for there to be no pay increases for the next 25 years! That’s a time horizon I think everyone is agreed the European single currency doesn’t have. Only a miracle increase in productivity, or devaluation will save these countries.

Italian consumers are on their knees...

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