labor costs have barely risen. This loss of competitiveness by the southern countries is central to their current poor economic performance and their lack of viable prospects for the future.
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If governments are obliged to cut back and consumers and/or companies are lumbered with excessive debts, it is to exports that these countries must look for salvation. For the eurozone as a whole to achieve prosperity and economic success, accompanied by stability and sustainability, will require the solution of both these problems. But are they simultaneously soluble within the current financial framework?
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If the southern members – "Club Med" – are to regain competitiveness within the euro, the only way is for their costs and prices to increase more slowly than costs and prices in the remainder of the eurozone, led by Germany. (Let us call these countries Germany.) If costs and prices in Germany are barely rising at all, then Club Med must regain competiveness by deflating – ie. costs and prices actually falling.
In an economy where prices are not fully flexible downwards, it will take a prolonged period of depressed demand and output to push prices down sufficiently.
But over the broad thrust of history, debt problems have been helped by inflation, and worsened by deflation....
http://www.telegraph.co.uk/finance/comment/rogerbootle/7884240/PIIGS-may-yet-fly-but-not-while-theyre-trapped-in-this-rickety-eurozone.html
