PORTFOLIO.HU | Blanchard: Eurozone integration needs to go forward or go back, but it c... - 0 views
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And, while lower investment since the beginning of the crisis has led to a smaller capital stock, again the effect appears quantitatively small. It is also difficult to see why the crisis would have led to a large decrease in total factor productivity. This being said, I would have expected a large output gap to lead to more downward pressure on inflation than we have seen. I see the fact that inflation is roughly stable is a puzzle. We are doing more research on this issue at the IMF.
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O.B.:There is no question internal devaluations are tougher to achieve than when you can adjust the nominal exchange rate. That’s well understood. A number of European countries have a competitiveness problem, which shows up in a large current account deficit.
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olve it. And there is no alternative for them than to become more competitive, to decrease the real exchange rate. Is it happening? I think it’s starting to happen, but it’s happening slowly, and it’s going to take a long time.
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Many countries have a tough adjustment to achieve. In doing so, they indeed have to be careful about their social implications. When adjustment requires a decrease in the real wage (or at least a decrease relative to productivity), it is essential that the decrease be fairly shared. You have to make sure that there is a safety net in place. If the pension system has to be made less generous, which is the case in a number of countries, you have to make sure the lowest pensions are protected.
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It is clear that adjustment in the Euro zone requires a decrease in the relative price of periphery countries and an increase in the relative price of core countries. If the ECB wants to maintain two percent inflation for the Euro zone as a whole, this implies, arithmetically, that core countries have to have inflation higher than two percent, periphery countries have to have inflation lower than two percent, until the adjustment has taken place.