Why I’ve been wrong about Europe

If only mentally, I predicted a worse summer for the European economies than they seem to be experiencing; furthermore the euro is back up in the 1.30 range.  Why was I wrong?  I was believing those economies have more wage stickiness than they actually do.  In this regard a lot of Keynesians and market-oriented economists have been making similar mistakes, albeit for different reasons.  Sticky wages are a core part of the Keynesian worldview, whereas many non-Keynesian economists are quite skeptical of European labor markets and their inflexibilities.

These days I browse British, Irish, Spanish and German newspapers with reasonable frequency.  I am struck by how many accounts of falling nominal and real wages I see.  Outside of Germany, the proverbial cat hasn't quite bounced, but it seems to have hit the pavement.

One theory is that most wages are actually fairly flexible, but we don't usually like to cut wages or have wages fall.  When needed, many wages can fall quite readily.  In other words, sometimes it is easier to cut wages by a lot than by a little.

I hardly think the European economies, or the Euro, are in the clear.  Differential rates of productivity growth, and the absence and impossibility of a common fiscal sovereign, still will make the arrangement unworkable.  But it's worth explicitly noting that so far my forecast has been off the track.


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