Posted by: Dirk | May 6, 2009

The EU’s House of Pain

On Monday, the EU’s economic forecast was published. It predicts a rate of unemployment of 20.5 precent for Spain in 2010, and 16 percent for Ireland in 2010. This comes amid news that US president Barack wants to change the tax code, which might give incentives for US multinationals in Ireland to scale back their operation, transfer money back to home or both. (An excellent blog on the Irish situation is irisheconomy.ie. If anybody knows a good blog on the situation in Eastern Europe, I would be glad if you would leave a comment.)

When the euro was introduced, there was talk about asymmetric shocks. Well, now we have one, and it looks different from what we expected. Most economists argued that an asymmetric shock would make monetary policy difficult, since the interest rate the ECB sets affects the whole euro zone. Well, we don’t have to worry about that one – monetary policy if without effect. But then, how do the Irish and the Spanish economy adjust? With devaluation/depreciation out, three possibilities remain:

  1. migration (both Ireland and Spain have experience with that)
  2. fiscal policy, or better, fiscal transfers from the rest of the eurozone
  3. falling nominal wages

However, all this can do its magic only after we get out of this depression – where to should the Irish and Spanish migrate now? Which country would like to bail out Spain and Ireland just now? Anyone? And how can falling wages be translated into exports in a climate of a decline in global trade? I would argue that right now, all these things are impossible.

Next week, I will be in Brussels with our students, discussing with people working for the EU’s institutions. The seminar, joint with Martin Heidenreich from the Jean Monnet Centre for Europeanisation and Transnational Regulations Oldenburg, is called The current economic and financial crisis: A challenge for the EU. And what a challenge it is.

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