I posed a question for Xavier Sala-i-Martin today on the website of El Pais (me: Dirk, Oldenburg):

¿Como va a salir España de la crisis y quedarse en la zona euro si solamente queda la opción de bajar los sueldos – o existe otra manera?

Si. Existe otra manera. Aumentar la productividad para hacer que lo que cobra el trabajador sea rentable para el empresario que lo contrata.

The European monetary union prohibits adjustment of the exchange rate in order to change the competitive situation. Monetary policy is also not available, which could in theory be used in order to deflate. Changing the price level is out of the question anyways because of arbitrage. So, two possibilities are left for adjustment of international competitveness:

1. the nominal wage
2. productivity

I have asked Sala-i-Martin whether downward adjustment of Spanish wages would be the only way available, and he answers that productivity growth would be the way out. My next question would be: how can Spain’s productivity grow faster than, say, Germany’s in the next few years?

UPDATE 08/07/2009: I did some quick fact checking on Eurostat. The following graph shows labour productivity per hour worked. The index (100) is the average EU-15 value, Germany is the blue line, Spain is brown.

Remember: this is only productivity. Germany had falling real wages for the last 8 years or so while wages in Spain were growing (see graph from The Economist below). The gap is wider than it seems…

If Spain plans to export itself out of the crisis, the adjustment will take many, many years. The process could only be sped up if Germany’s wages go up (or it’s productivity falls), but that is not very likely to happen. However, some European macroeconomic coordination to shift the burden of adjustment might make sense.

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