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Europeans Facing a Decade of Lost Wages

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Interesting commentary from Bloomberg Economist Joseph Brusuelas this morning paints a grim future ahead for European workers. The problem is this: whenever there is a banking, budget or even a private debt crisis and the option of devaluing the currency is unavailable, as is the case with the European Union, deflation in labor costs and prices is the only option left.

Brusuelas writes:
"Countries facing sovereign debt crises typically bring down their costs and jumpstart their competitiveness by devaluing their currencies. This option is not available to the countries tethered to the euro, meaning that the members of the euro zone that must restructure likely face a lost decade of wages instead."
Using figures released by Eurostat this week, real labor costs are forecast to fall to a greater or lessor degree across virtually all of Europe after increasing in 2009. Ireland, naturally, is expected to see the worst wage declines, followed by Greece and Portugal.

OK, so is there some kind of end-game to this deflationary wage spiral? What's next?

According to Brusuelas, the answer depends on the country's debt burden:
"Greece and Italy, with debt in excess of 100 percent of GDP, are at risk of falling into an austerity trap. Belgium may also be in trouble, with debt at 96.2 percent of GDP, which is above the 90 percent threshold suggested by Carmen Reinhart and Kenneth Rogoff in the empirical study “This Time it’s Different” as the point at which risk of a sovereign debt crisis escalates. While the private debt problems in Portugal and the banking problem in Ireland are substantial, they are more easily solvable than those facing Spain."
Interestingly, Brusuelas notes that Germany, after experiencing rising wages in the 1990s overhauled its labor laws to make it more competitive. The result? Flat wages for the past 10 years. Of course, the key here is that Germany's reforms occurred during a global bull market and a period of prosperity.

Perhaps the only birght side in all of this, at least for New Yorkers, is Abercrombie & Fitch (ANF) stores just got a little less crowded.
POSITION:  No positions in stocks mentioned.