It is interesting how orthodoxy is right even when it is wrong
Troika economists have a problem. It’s huge: cutting wages clearly did not work as intended, which goes against their deepest convictions. In such a situation people tend to rationalize. To quote Goethe: “intelligent people are sharpest when they are… wrong“. Some recent publications enable us to investigate the rationalization process of among others ECB economists. One of these is a Voxeu piece by Eric Bartelsman (head of the department of economics of the Vrije Universiteit van Amsterdam), Filippo di Mauro (senior advisor in the research department, ECB) and Ettorre Durucci (head of the convergence and competitiveness division, ECB) which clearly shows that cutting wages did not work as intended (see their figure 1). How did they cope with this?
Figure 1. Relative prices and activity in selected Eurozone countries (change between the year of the ULCT-deflated REER peak and 2014 projected)
Figure 1 shows that
* As a consequence of…
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