Italian Prime Minister Mario Monti’s program includes no general wage cuts. In Portugal, the government abandoned attempts to engineer unit labor cost reductions through “internal devaluation” after meeting political opposition. In Ireland, the Croke Park accord prevents the government from further reducing public-sector wages. Despite nearly two years of troika programs, Greek unit labor costs have hardly budged.
That is from Peter Boone and Simon Johnson (pdf). Here is another batch:
Once risk premiums are incorporated in debt, Greece, Ireland, Portugal, and Italy do not appear solvent. For example, with a debt/GDP ratio of 120 percent and a 500-basis-point risk premium, Italy would need to maintain a 6 percent of GDP larger primary surplus to keep its debt stock stable relative to the size of its economy. This is unlikely to be politically sustainable.
I am not suggesting that a 6 percent of gdp primary surplus is easy. Nonetheless some countries are unwilling to do it. One is free to take a Keynesian view of how spending cuts damage gdp in the short run. Even then, Italy could combine an increase in private debt with wealth transfers (e.g., give creditors a mortgage share in Italian homes), but of course they don’t want to. Today, Italy could still enjoy a living standard better than what the country had in the 1980s, when everyone was calling it so dynamic (not your grandfather’s Versailles Treaty). That’s no longer good enough.
Critics get it wrong when they blame the euro crisis on “too much socialism.” For one thing excess public ownership is only a secondary problem (while a problem), for another thing Sweden is doing fine. When it comes to “failure to remedy the euro crisis,” as opposed to initial causes, let’s look long and hard at “unwillingness to consider solutions which admit that citizens’ standards of living will fall.” That’s not socialism, but it is one pernicious form of modern interventionism and you will find it very much here in America too.
On a somewhat different note, here is a good blog post on the shortening of collateral chains, and how the ECB’s policies are hitting at some REPO markets.