The stronger economies in the northern region of the euro area should accept a pickup in inflation as their southern partners try to emerge from the debt crisis by cutting wages, according to an International Monetary Fund staff study led by Chief Economist Olivier Blanchard.
“If it wants the South to adjust, the North must accept more inflation, a point that has been emphasized by the IMF but has not been always fully understood,” Blanchard and his co- authors wrote in the study, which reviews IMF advice to advanced economies facing high unemployment.
“To meet the 2 percent inflation target at the euro area level, inflation must be lower than the target in the South and higher than the target in the North.”
The main tool to spur employment in countries such as Greece is to improve competitiveness, the report said. While measures to boost productivity are the best way to address it, they take time to show results, leaving these nations little choice but to cut relative wages and prices, it said.
The euro area as a whole, with an average unemployment rate of 11.9 percent in January, is suffering its second recession since 2008. Still, the austerity demanded by policy makers in exchange for aid amid three years of debt woes is starting to deliver the competitiveness needed to restore economic growth, with the so-called peripheral euro nations reviving manufacturing and trade.
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