Friday, February 05, 2010
El Batacazo Infects the EU
The euro is falling relative to the dollar. Whether the common currency withstands this latest threat depends greatly on Spain. The most vulnerable peripheral countries—Portugal, Ireland and Greece — combine for only 6% of euro-zone GDP. When Spain is added to the mix that share rises to almost 20%. Though often lumped into the smaller periphery, it has one foot in the core group of Germany, France and Italy.
The problem is that the monetary union did not equalize labor productivity - the South did not catch up with the North. For linguistic reasons, there is no free migration in Europe that could soften the differences, like in the US. Equalization of social entitlements without parallel equalization of productivity means the eventual bankrupcy of these weaker countries.
What to do?