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rfmcdonaldI would like to congratulate my co-blogger Edward Hugh for gaining the international attention that he deserves, as evidenced by an article in the New York Times, no less. He was certainly ahead of the times, and it is time that he has been recognized for his prescience. (I've reproduced his thesis below.)
For years, almost nobody paid attention to the sky-is-falling alarms of Edward Hugh, a gregarious British blogger and self-taught economist who repeatedly predicted that the euro zone could not survive.
[. . .]
“I guess I am countercyclical,” he said with a laugh. “For all the years during the boom when everyone was doing well here, I wasn’t doing anything. Now I am a household name in Catalonia.”
Well, not quite. The idea of the economist as a pop celebrity in the mold of a Nouriel Roubini, whose early prediction that the United States housing market would collapse later brought him fame and a worldwide consulting brand, or a Paul Krugman, the Nobel-winning economist who writes an Op-Ed Page column for The New York Times, is still unformed in Europe and in particular in Spain.
But as questions rise over how European governments can escape their debt trap and resume growth, Mr. Hugh, who has been pondering this topic for years, is for the first time being turned to for insights and wisdom.
His bleak message, in newspaper columns, local television and radio appearances, and in meetings with officials, is almost always the same: since Spain and other struggling countries of the euro zone like Greece, Portugal, Ireland and Italy cannot devalue their common currency unilaterally, they have little choice but to endure what would essentially be a 20 percent internal devaluation instead. That means their public and private sector wages need to fall by roughly that amount if those countries are ever to restore competitiveness, lift exports and bring in the cash needed to pay down their debts.
“Why haven’t these countries converged” with the rest of Europe? he asks. “It’s demographics. As populations age, there are fewer people in their 20s to 40s to buy new houses, so they save more. The younger a country is, the more dependent it is on credit to get growth.”
Germany, where the average age is 45 and rising even as the population is beginning to shrink, is a nation of savers, and public policy has encouraged keeping wages under control and building up export industries.
By contrast, the younger Greeks, Irish and Spaniards went on borrowing binges, driven in particular by rising demands for new homes and consumer goods that, in several cases, turned into housing bubbles before going bust. Wages were pushed up, encouraging spending but soon making it all but impossible for their industries to compete with the thrifty Germans, Dutch and other Northern Europeans.
