(WALL STREET JOURNAL) — Greece’s dysfunctional economy is now at the heart of a rescue effort that could be disastrous for the entire continent—and the rest of the world.
Germany and France are cooking up a belated support package for Greece, but they have made it abundantly clear that Greece must slash public sector wages and other spending; the Greek trade unions get this and are in the streets. If Greece (and [Portugal, Ireland, Italy, and Spain]) still had their own currencies, it would all be a lot easier. Just as in the U.K. since 2008, their exchange rates would depreciate sharply. This would lower the cost of labor, making them competitive again while also inflating asset prices and helping to refloat borrowers who are underwater on their mortgages and other debts.
Since these struggling countries share the euro, run by the European Central Bank in Frankfurt, their currencies cannot fall in this fashion. So they are left with the need to massively curtail demand, lower wages and reduce the public sector workforce
The last time we saw this kind of precipitate fiscal austerity—when nations were tied to the gold standard—it contributed directly to the onset of the Great Depression in the 1930s.