I agree, this is a nice graph. And although I generally sympathize with Rodrik’s ideas I think that this analysis is to much on the surface. In particular, he staes the following:
“The chart reveals an important reason behind Italy's poor performance: a large real exchange rate appreciation. Compare this for example to Germany, where significant real depreciation (an increase in external competitiveness) has stimulated export growth and has been an important driver of recent growth. [..] If the Eurozone was a country rather than a loose grouping of countries, workers would be migrating en masse from Italy to Germany. It's not clear that there are similar equilibrating mechanisms within the Eurozone.“
As many of the Italians in Rigot will be willing to ascertain, Italy’s poor performance roots in much deeper problems. Similarly, for Germany much of the real exchange rate depreciation is due to wage restraint over the last years.
I guess what I am tying to say is that the real exchange rate is endogenous and the outcome of underlying conditions, which are at the core of the problem. This is why part of the conclusion of Rodrik is wrong, Germany has had wage restraint over the last years and was (partly) therefore able to remain competitive. Hence, one would not expect people to move to Germany, but rather - what happened over the last years - see people leaving Germany to Switzerland (like me), Austria (like my cousin) and the Scandinavian countries (well none of my family members moved there yet…I should ask my brother what he thinks about moving there given that he is a (militant) non-smoker and the findings in the below post).
4 comments:
I interpreted Rodrik's post as a statement that Europe is not an Optimum Currency Area. With a flexible exchange rate, it could just depreciate instead of convincing trade union to restrain wages. But Rodrik should be careful. If I remember correctly, Nouriel Roubini once said during a panel discussion that Italy might drop out of the Euro. Italy's then and now minister of finance Tremonti got really angry and told Roubini to go home to Turkey. With the same nationality, Rodrik should maybe start to look for flight, they are not so cheap these days...
maybe I was not clear enough. I see the point of depreciating the nominal exchange rate, if there was not a common currency. What I wanted to say is that even if the Euro area were an OCA, I would not expect Italians to move to Germany, exactly because the competitiveness relies on stagnating and partly nagtive real wage developments in the last years. Looking only at relative prices does not tell you this part of the story, and hence may lead you to incorrect conclusions. That was my point....
The last point you have touched on, I think is cucial and maybe something that future policy or research schould exapnd on. It seems that all of Optimal Currency Area Theory forgot about the Unions and differences in national wage negotiations. I agree with your point that the real exchange rate reaction is mostly endogenous. The real exchange rate however is a relative concept. So the extent to which the wage demands of italians are too high is only determined by very low wage inflation in Germany. It is very difficult to say what the correct rate of rises in wages is. Therefore maybe it would be best if the EU would enforce a sort of Maastricht criteria for wages. This would keep countries with high wage expectations and those exercising wage moderation in check. Otherwise there is a serious danger of Beggar-Thy-Neighbour here.
guys, this is getting serious...we have a famous policy recommendation, right there!wow...all you have to do now is write the paper...
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