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"Wage Cuts in Southern Europe Inevitable"

Published: July 21, 2012; 15:22 · (Vindobona)

Christian Keuschnigg, director of the Austrian Institute of Advanced Studies thinks that a fiscal union will not work. The recession in Southern Europe will go on.

"Wage Cuts in Southern Europe Inevitable" / Picture: © Institut für Höhere Studien - Institute for Advanced Studies

For Keuschnigg, the major problem is the „enormous indebtedness of the private sector and the public finance“. In future, private households will need more equity in order to take a loan for properties, the economist says in an interview with the Austrian newspaper "Presse". Otherwise, the next recession will cause a big insolvency surge, Keuschnigg considers. „And of course, the states must reduce their public debt.

Keuschnigg thinks that a decentralized fiscal policy would be better than a centralized policy. „The fiscal policy of one country must not become a problem for another one. That´s why we need the fiscal pact in order to limit deficits.“ What is more, Keuschnigg supports the idea of a banking union and a centralized financial market authority. „This must not end in a situation where well-positionned banks permanently support weak banks. The precondition is a bank insolvency law.“

In Southern Europe, a sustainable reduction of public debt is inevitable, Keuschnigg asserts. „Otherwise, there will be no growth in these countries.“ The principle of „loans against reforms“ must be kept, the economist says. „The European Union must not be blackmailed.“

The main reason for the debt crisis is the lack of competitiveness in Southern Europe, Keuschnigg explains. In the short run, only wage cuts may biring a recovery. „Of course, the preferred alternative would be to improve the productivity through innovations, privatizations and rationalizations. But this takes time, which we simply do not have.“