Click here to listen to the Bloomberg interview with Patrick Honohan.
Author: Philip Lane
Congratulations to Kevin on his election to the Royal Irish Academy: the full list of new members is available here. (Fellow economist Amartya Sen was elected as an honorary member.)
Last week saw the release of a major study (by a group of political scientists and economists, including this blog’s Kevin O’Rourke) of the factors that explain voting decisions in the Lisbon Treaty Referendum: you can read it here. No doubt these factors will be closely studied in deciding strategies for the upcoming 2009 vote on the ‘modified’ Lisbon referendum.
Paul Krugman’s article in today’s NYT describes his perspective on the European situation. His main focus is on thedifficulty in European-level policy coordination, in view of the current institutional configuration. However, he also flags the adjustment difficulties facing Spain (largely similar to those facing Ireland):
“In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.”
It is interesting to note that Krugman accepts the thesis that wage cuts are required as part of regional adjustment within the euro area (indeed, he has signalled this on his blog in the past). For Ireland, the level of pain may be lower than in Spain, in view of the relative flexibility in the labour market and the potential for the social partners to contribute a pain-reducing level of coordination to the wage adjustment process as part of an overall reform package. However, a slow rate of adjustment will lead to a prolonged period of high unemployment. In addition, the slower the rate of economic recovery, the worse will be the fiscal situation.