European Politico-economics QA Mega-thread - Page 731

On March 25 2017 04:17 bardtown wrote:
I think it's hard to attribute that success to the EU. Who's to say what Portugal would have done if it had spent the last 20 years outside the EU instead, seeing neighbouring countries making those reforms? As I understand it, Portugal was a great country long before the EU came along, and is currently more progressive than the rest of the EU on issues like drug decriminalisation. If only sharing a currency with Germany hadn't kept it at the bottom of the pile after 2008.

On March 25 2017 08:14 bardtown wrote:
I have no doubt that liberalising trade helped transform Portugal. The same is true for pretty much every other country in the world, though. Communism/protectionism burnt out and the free market took over resulting in massive global growth. Trade barriers between European countries would have fallen just like they did - and continue to do - throughout the rest of the world. But the EU is not a true proponent for free trade, except within the continent. There are huge tariffs on goods from outside the EU. In an attempt to shelter Europe from competition from the emergent blocs they have stifled competitiveness and innovation in the EU itself.

Wage devaluation is not really comparable to currency devaluation. You could even argue that the entire point of currency devaluation is to avoid wage devaluation.

On March 25 2017 08:31 warding wrote:

I pay 6% tariff on the electronics components I import from China. I'm not even sure that's an eu thing, more like a WTO arrangement. It's just untrue that the EU is protectionist, except maybe in agriculture and that I would agree is bad.

Why isn't it comparable? Internal devastation is trickier to accomplish politically, but the theoretical impact is the same. A monetary devaluation is in effect a devaluation of wages and wealth.

On March 25 2017 08:59 bardtown wrote:

Yeah there are huge tariffs on agriculture, but that's not all. Also on cars, and all sorts of processed goods. You can buy cocoa beans from Africa tariff free, but processed chocolate? Huge tariffs. This prevents the economies that should rightly benefit from the industry from doing so, restricting them to subsistence farming.

It's not comparable because a currency devaluation does not directly hit the finances of individuals in the country. When your currency is devalued domestic produce remains relatively affordable and your exports become more competitive, etc. A lower currency is not necessarily a loss. Countries like Japan, Switzerland the UK have traditionally worked pretty hard to try to keep our currencies low. Wage devaluation on the other hand does not act as a stimulus. It is a direct cut to the finances of your entire population and will reduce economic activity across the board.

Look at the UK right now. Our currency devalued by 15% and, thus far, we are still experiencing real wage growth. We also have GDP growth driven primarily by consumers. Imagine if you cut wages by a comparable figure instead. Disposable income would be slashed, resulting in low growth if not recession.

On March 25 2017 05:58 Thaniri wrote:
Poland and Czech Republic are keeping their own currency and have had fantastic growth under the EU.

But also Romania kept its own currency, though in day to day use the euro is just as popular. Unlike Poland where you cannot use a euro to buy a beer in most of the country.

One of the concerns I hear is that because the Polish currency is so weak, if they switched to euro and then were forced to price match the cost of goods to the rest of the EU they would not be able to buy food. A guy working for 10PLN per hour can buy a liter of milk for 4PLN lets say. If he earned 2 euros per hour, that liter of milk might cost him 1 euro. That is a big drop in purchasing power.

On March 25 2017 05:24 Nyxisto wrote:
disproved as in "we have plenty of examples and arguments that show that this policy doesn't work", obviously it's not a mathematical proof and there's nuance to it. But there are many structural issues that make monetary policy an ineffective tool. Not just the investor trust and bad practical results in the past, but also global supply chains in the future. If you rely on imports as almost any developed nation does a devaluation will directly hurt you and might be ineffective, you're closing yourself off to transfer of knowledge, capital and so on, you hamper innovation in your own country because you combat competition through monetary means rather than better products.

Practical example is Greece. Greece biggest export is refined petroleum. To sell this they need to buy... petroleum. If they get out of the currency union every advantage in competitiveness will be offset by increased import prices.

The better mid and long term solution is almost always to fix the underlying problems in the region.

On March 25 2017 10:27 warding wrote:

When you devalue wages your domestically produced goods and services decrease in price too - since labor is a major input - while national industries become more competitive so your exports increase just the same. In both situations, the population doesn't lose purchasing power for domestically produced goods and services but it does lose purchasing power for imports, while companies become more competitive abroad. The main differences are in what happens to debt holders in different denominations.

I don't see why the UK example is relevant. The context in which it makes sense to consider internal vs external devaluations are in recessions where you have to correct such imbalances in the economy.

On March 25 2017 21:41 bardtown wrote:

Let's say wages are 50% of the input cost for your product. To achieve a 15% devaluation of your product you need to cut wages by 30%. That's huge inflation for domestic produce, not stable prices, and it is directly targeted at the consumers. Devaluing your currency protects consumers by absorbing the shock.

On March 25 2017 22:31 warding wrote:

Where do the other 50% come from? The answer, particularly in expert industries, is that they come from imports. If you devalue your currency you find the same inefficiency in the rdevaluation - that is, your price competitiveness does not vary by the same % as the devaluation.

I'm not sure what you're talking about regarding inflation and unstable prices. How are the effects on prices different in both cases domestic goods tend to stay stable (except for those that need imports to be produced) while imports increase in price.

On March 25 2017 23:58 warding wrote:
If wages of hairdressers are cut by 20%, the cost of haircuts drops by 20%, purchasing power stays the same with internal devaluation, as it would with monetary devaluation.

Limiting your payroll expenses to between 15 and 30 percent of your gross income can help to keep your business in good financial standing. It’s normal, however, for certain industries to spend much more on payroll... In a 2007 survey, the U.S. Census Bureau reports that child daycare services have the highest payroll costs of 50.77 percent.

On March 26 2017 00:18 bardtown wrote:

For the third time, this is wrong. They have to pay for rent and equipment and refreshments and whatever else. Cutting wages by 20% allows them to reduce the cost of a haircut by a fraction of 20%, depending on the proportion of their costs that wages account for. That reduces purchasing power which reduces economic activity which reduces growth. Cutting wages is exactly the wrong thing to do if you want your economy to grow. It has a much more fundamental impact than fluctuations in a floating exchange rate.



In other words, even in the best case scenario, a 20% cut of wages is going to give you the freedom to reduce prices by ~10%. In most cases, significantly less.

I don't want to keep going over the same points, so I think we can just agree to disagree.