A tale of two gaps – A Comment on the European Solidarity Manifesto

The paper by Kawalec and Pytlarczyk (2012) (henceforth, K-P), and the shorter “European Solidarity Manifesto” (http://european-solidarity.eu/; henceforth, ESMA), address two different set of questions. (1) Should the Euro be dismantled? What is the origin of the Eurozone (EZ) depression? Is it temporary or curable? In their view, the ‘key problem’ is the loss of international competitiveness of the weakest EZ countries; the competitiveness gap is “very difficult or even impossible to correct without a devaluation” (given the price/wage downward stickiness, and the limits to austerity posed by democracy); and if corrected, it may easily arise again in the future. Hence the Euro should be dismantled. (2) How should the Euro be dismantled? Their view is that it should start with a German exit, and should be managed in a cooperative way. K-P describe their preferred procedure. I will here discuss only the first, more fundamental set of issues. I will argue that in principle the Euro is curable, but won’t be cured. The economic problems of the EZ periphery – unemployment, public debt, banks weakness, etc. – all arise from a lack of economic growth. I will therefore start by asking what is, and is going to be in the next 10 years, the main constraint in the EZ on growth. I will also discuss the role of the ‘competitiveness gap’ in this respect. I will end with some thoughts on the optimal political strategy to solve the Euro conundrum. Italy will be used as a case study to illustrate some more general points.