Thursday, November 18, 2010

The Tough Existence Living Life on Euro’s Periphery

by David Roman

Wall Street Journal

November 17, 2010

You know things are getting dicey when your best hope is a deflationary recession. Thus is Spain’s and Portugal’s predicament.

Like fellow euro zone trouble cases such as Greece and Ireland, Spain and Portugal emerged from the 2008-2009 financial crisis with domestic demand clobbered and a big competitiveness problem.

Germany had controlled output costs during the last decade by keeping a lid on wages and flirting with deflation. By contrast, for countries such as Spain and Portugal — considered to be on the euro zone “periphery” – big wage increases and above-average inflation sent relative output costs soaring.

The result is that the periphery is stuck with large trade deficits and can’t compete for foreign markets with Germany, which remains the euro zone export powerhouse.