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11/27/15

QE: Lost In Contradiction: The IMF And Competitive Wage Dumping In The Euro Area - by Ronald Janssen

A staff discussion note published recently by the IMF addresses the argument that squeezing wages across a large part of the euro area is dangerous and deflationary as it will not improve anyone’s relative competitive position while undercutting domestic demand everywhere.

 Since the IMF has always been a staunch advocate of the ongoing euro area experiment of substituting currency devaluation with wages devaluation, it is worth taking a closer look at its work.

The IMF bases its findings on a simulation whereby nominal wage growth in a set of five countries representing an economic weight of 30% of the euro area (Greece, Italy, Spain, Portugal, Ireland) is reduced by 2 percentage points over the course of two years. Importantly, this simulation is carried out under the assumption that the ECB’s hands as regards cutting its interest rates are tied because these rates are already hitting the zero mark. It is also assumed that lower wages growth is fully passed on into domestic prices, implying that there are no cuts in real wages.

Note EU-Digest: QE - Money printing presses going full speed and major dangers lie ahead for the US, EU and Japanese economies. When they come they will make the 2007/2009 economic crises look like child's play.

Read more: Lost In Contradiction: The IMF And Competitive Wage Dumping In The Euro Area

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