The only way for the indebted periphery, largely the PIGS countries (Portugal , Ireland
Greece and Spain) to get back on track and to repay the debt is to kick start growth.
Previously the growth was funded by cheap debt. This option is no longer available.
The only other option now is to increase output by gains in productivity. However, there
is a sharp division between the highly productive Northern and the less productive
Southern Europe.
Peripheral Europe imports more than it exports. This leads to a large balance of payment
deficit vis-a-vis the northern countries.
The current account deficit is not being addressed by any of the policies that are being
discussed. The process of internal devaluation would keep countries like Greece in the
euro. The process of cutting wages to become competitive is not feasbile. Historically,
it has led to social unrest and the overthrowing of governments in other countries where
it has been tried.
In order to protect the peripheral nations start again, an exit from the euro and a
devaluation of the new currency unit. This would free the troubled countries of
debt service and restore competitiveness via a cheap currency.
The base case scenario is that Europe will try to muddle through for a while
longer until one or more countries exit.
Sheila McKinney
