Mark Schieritz at Herdentrieb, with a nudge from Sebastian Dullien, has spotted a way to bring about a competitive rebalancing of the euro area without the costs of imposing massive demand deflation on the uncompetitive periphery. Social partners (with or without government) should set wages in such a way as to reduce competitiveness imbalances in order that macro policy can support demand (or at least dampen as little as possible with a view to getting the needed price and wage adjustment.
Now why hasn’t anybody proposed that before?
Why did no-one try and integrate a wage-policy-centred approach within a broader blueprint for overcoming the crisis or give thought to the constraints on wage policy and the need to interact with (a symmetrical) macro policy?
Why did no-one try to convince the political actors of this approach much earlier in the crisis and get the support of about 190 economists and social scientists?
Indeed, why weren’t people proposing well before the crisis that a European institution like the Macroeconomic Dialogue could be used to avert the build-up of competitive imbalances in the first place?
Anyway, let’s hope some influential people charged with ‘New Economic Thinking’ pick up on Mark’s new insight into low-cost ways to achieve euro area rebalancing.