Adjustment Difficulties in the GIPSY Club. CEPS Working Document No. 326, March 2010

Gros, Daniel. (2010) Adjustment Difficulties in the GIPSY Club. CEPS Working Document No. 326, March 2010. [Working Paper]

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Abstract

This paper describes the key economic variables and mechanisms that will determine the adjustment process in those euro area countries now under financial market pressure. (Greece, Ireland, Portugal, Spain and ItalY = GIPSY). The key finding is that the adjustment will be particularly difficult for Greece (and Portugal) because these are two relatively closed economies with low savings rates. Both of these countries are facing a solvency problem because they combine high debt levels with low growth and high interest rates. Fiscal and external adjustment is thus required for sustainability, not just to satisfy the Stability Pact. By contrast, Ireland and Spain face more of a liquidity than a solvency problem. Italy seems to have a much better starting position on all accounts. Fiscal adjustment alone will not be sufficient to ensure sustainability. Without significant reductions in labour costs, these economies will face years of stagnation at best. Especially in the case of Greece, it is imperative that the cuts in public sector wages are transmitted to the entire economy in order to restore competitiveness, and thus ensure that export growth can become a vital safety valve. Without an adjustment of wages in the private sector, the adjustment will become so difficult that failure cannot be excluded.

Available Versions of this Item

• Adjustment Difficulties in the GIPSY Club. CEPS Working Document No. 326, March 2010. (deposited 13 Aug 2010)[Currently Displayed]
  • Adjustment Difficulties and debt overhangs in the Eurozone periphery. CEPS Working Document No. 347, May 2011. (deposited 05 May 2011 17:11)

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