Wage cuts “only” way out of the crisis, says central bank

Fernández Ordóñez advocates “internal devaluation”

The governor of the Bank of Spain, Miguel Ángel Fernández Ordóñez, on Tuesday argued that the “only” way for euro zone countries such as Spain to restore competitiveness was to push down wages and costs and increase productivity.

Earlier this month, the conservative Popular Party government approved a reform of the labor market, which makes it cheaper and easier to sack workers. But unions and other critics claim the ultimate aim of the reform is to push down labor costs.

“In the absence of the possibility of a foreign exchange devaluation, domestic devaluation — that is, an adjustment to prices and salaries, along with increases in productivity derived from better management of labor — are the only alternatives available in the very short term to give a push to and recover lost competitiveness,” the central bank chief said in a speech, a copy of which was made available on the bank’s website.

The governor lamented the fact that during the economic bonanza unleashed by entry into the European single-currency block, euro-zone countries failed to take the opportunity to make their labor markets more efficient. “Unfortunately, during the years of expansion, practically no progress was made in eliminating the frictions and structural rigidities that distort the working of the labor and product markets in a number of countries,” Fernández Ordóñez said.

While lauding the action of the European Central Bank, the central bank chief urged European leaders to push ahead with the establishment of the European Stability Mechanism, the permanent version of the European Financial Stability Fund. “Short-term measures by the ECB do not serve to resolve the core problem exposed by the crisis: the need for mechanisms that address the risks that occur as a result of countries having heterogeneous structures,” he said.

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