OK, for a bit of relief, here’s a dispute among reasonable people. I think I’m right (but then I would, wouldn’t I?), but it’s worth serious discussion.

Wolfgang Munchau, in the course of an article I otherwise agree with, argues, contra what I and others have been saying, that there isn’t a need for a large real devaluation — internal or otherwise — on the part of Spain and other peripheral economies:

The distortions in competitiveness between eurozone member states are important, but in the short run, I would ignore them for three reasons. First, the competitiveness gap is not as big as some of the estimates suggest. I am especially wary of analysis that shows a divergence of unit labour costs, or other national price indices, since 1999 when the euro was introduced. Germany entered the eurozone with an overvalued exchange rate, which has exaggerated the extent of the subsequent adjustment made by Germany compared with others.

I know that Richard Portes, another analyst I very much respect, shares that view. So where’s the difference?

The data, whether using unit labor costs or some other measure like GDP deflators, look like this:

So what are the possible counter-arguments?

One is that the divergence between Spain and the euro area average isn’t nearly as big as the divergence between Spain and Germany. Fair enough — but the euro average includes Spain and other GIPSIs, which in total are about 1/3 of the eurozone’s GDP, so the Spain-EA difference understates the actual adjustment required.

Second, Munchau’s argument that Germany was badly overvalued in 1999. But it had a roughly balanced current account; I think it’s hard to make the case that it was a really big overvaluation.

Third, Munchau’s correct point that current account imbalances have narrowed since their peak on the eve of the crisis. As I read it, however, this largely reflects the depressed state of the peripheral economies rather than any large improvement in competitiveness.

Finally, all these measures of competitiveness are highly imperfect — which they are. If other data were telling a different story, I’d be prepared to discount the figure above; but they aren’t.

I guess in the end my view comes down to the falsity of the doctrine of immaculate transfer. We know that huge current account imbalances opened up when capital rushed to the European periphery after the euro was created, and reversing those imbalances must involve a large real devaluation — a devaluation that has barely begun.

But let’s talk about this.