Bad news from Brussels

Eurointelligence kicks off today with an FT story which makes depressing reading: European finance ministers appear to have turned down Larry Summers’ eminently sensible call for a coordinated global macroeconomic stimulus package. The eurozone is not the gold bloc, to be fair, but one wonders whether a political generation that has invested so much political capital in the SGP will be capable of averting the disaster that faces Europe. (And even if individual policy makers do understand what is needed, European fiscal fragmentation appears an almost insuperable obstacle to the Europe-wide Keynesian policies that are needed now, as events in our own little country dramatically illustrate.)

Europe may be a second class political power on the world stage, but it is a first class economic power, and so all of this is very bad news indeed. Has the April conference failed before it even opens?

12 replies on “Bad news from Brussels”

It remains to be seen what the best approach is to tackle this crisis. A typical counter-cyclical approach may not be the most effective way of correcting the effects of a bursting credit bubble. Austerity measures in Europe, and especially in Ireland, will worsen the crisis, but they could also help to ensure a swift correction rather than a long and drawn out stagnation – as in the case of Japan.

On the other hand, it is not desirable to introduce austerity measures that may cause lasting economic damage. Some kind of middle ground is necessary.

Surely the majority of the blame for this must rest with Germany, no? If it won’t step up to the plate with a really big stimulus it’s hard to see the rest of the EU’s response being anything but inadequate.

The post makes quite a few value judgements, quite debatable in my view.
For “depressing reading”, I see “sensible reading”. For “sensible call”, I read “last-ditch call”. For “very bad news indeed”, I read “as expected”.
European fiscal fragmentation is led by Ireland, with a deficit in the double digits.
It has to be patently clear, even to non economists, that Europe will remain on a less reflationary trajectory than the UK and the US. We can argue about the wisdom or otherwise of such policies, ad infinitum (and hopefully supported by evidence, not just opinion). It is however a given fact.
Complaints about the rules of the game, from Ireland, are always interesting for what that may say about the advice given to policy makers.
So “one wonders whether a political generation that has invested so much political capital in the SGP will be capable of averting the disaster that faces Europe”… if public deficit outliers (notably Ireland) cannot be brought back to near the average of “core Europe”. And pronto. (The latest news of Latvia ought to be edifying).


The world economy is contracting as fast, IF NOT FASTER, than it did during the Great Depression. That is not a value judgement, but an easily demonstrable fact, and one from which several pretty obvious consequences flow. In particular, the world needs a global, coordinated macroeconomic boost — the coordination is important, since otherwise protectionism is going to become a real problem, and since without coordination everyone will have an incentive to do too little. I don’t want to see unemployment at 20% plus in major economies, with all the misery and dangers that that would involve for the world. That is a value judgement, I accept, and one for which I certainly don’t apologize.

Ireland is not leading fiscal fragmentation. Rather, fiscal fragmentation was built into the Maastricht Treaty right from the beginning. We don’t have a strong central fiscal authority spending a large chunk of Eurozone GDP, in the manner that is true in for example the United States. And that, in my view, is a big problem right now, not just for Ireland but for the Eurozone as a whole.

I am not the enemy Ciaran. I accept that Ireland has no choice but to try to get back to fiscal balance. I have never argued otherwise. Hence, your comment that “Complaints about the rules of the game, from Ireland, are always interesting for what that may say about the advice given to policy makers” is completely and utterly misplaced.

As an academic economist I have to be intellectually honest, and the world is a complicated place. Clearly, in a situation where there is a real lack of aggregate demand, then if everyone simultaneously cuts back the way we are having to do, that will be very bad for the world economy. How could one possibly argue otherwise? The second best solution at the European level, absent a central Eurozone fiscal authority, is for those who have surplus fiscal capacity to increase expenditure by much more than is being proposed now. And the first best solution at the world level is to get agreement of the sort that is being pushed by the Americans.

The big historical lesson of the 1930s is that if you get the macroeconomics wrong, then international markets can shut down remarkably quickly. And, if I may be permitted a second value judgement, I don’t actually think that that would be a good thing.

I’ve noticed there’s been a lot of discussion on this blog about counter cyclical fiscal and monetary policy in order to avoid depressions. There’s also been a lot of discussion about deflation (and disinflation), what there hasn’t been is discussion of inflation. This is the elephant in the room and is surely inevitable once the volatility of money speeds up after an initial disinflation. The amount of money being created out of thin air is phenomenal.

The monetary policies of the US, UK and even the ECB will surely lead to high inflation. Warren Buffet alluded to this in an interview this week, CNBC I think.

Art Laffer predicts hyperinflation on CNBC 25th Feb 2009

Peter Schiff is another predicting high inflation in the US. I wonder if the cure will kill the patient.

Either way we’ll get a depression, the second way will just disguise it (initially) with inflation. Output will fall regardless and the correction will likely be much longer and more drawn out.

Falling prices are the antidote to deflation

Economic recovery requires saving

It has been frequently posited that the great depression could’ve been avoided with active monetary policy, well we’re now testing that hypothesis. Will we find a shortcut?

“Complaints about the rules of the game, from Ireland, are always interesting for what that may say about the advice given to policy makers.”

Reading Ciaran O’Hagan’s comment reminds me of James Carville’s famous quip: “I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

I don’t think we should be intimidated from having an open exchange of views, however frowned on by the bond market. Isn’t that what a blog like this is for?

An interesting discussion, which highlights a question that have been looming out there unanswered for a while now.
What are the specifics of a coordinated macroeconomic stimulus across Europe and beyond? We know that currently deficit countries are bearing the lion’s share of the stimulus spending to replace aggregate demand and that this if unchanged, may lead to the 1930s style results that Kevin suggests. However the mechanics by which stimulus is successfully applied in surplus countries is less clear. While there is some reason to be optimistic that “surplus” countries like China could expand aggregate domestic demand, the evidence appears to be that their stimulus is mainly being spent on investments which will enlarge their exporting capacity. It’s even harder to see how Germans can be persuaded to spend more, given historical, cultural and demographic factors there and the same applies to Japan, where older savers have dominated the population and the economy for many years.
Can anyone clarify this question?

How is your German Mick? Mine is disgracefully schoolboyish, but Wolfgang Munchau is fighting the good fight within Germany (which is where matters) here:

I guess one of the big lessons of the Great Depression is that when the leaders of different countries have different diagnoses of the problem, as was true then, then that does indeed make coordination difficult. The solution to that in principle is political leadership — easier said than done, especially within Europe! Your point about China, if true, is a very interesting one.

Mick – Stimulus spending to replace aggregate demand is the right solution if the problem were lack of aggregate demand. But that is not the origin of this crisis. And it is certainly not in the interests of the deficit countries (Ireland, US…) to stimulate further aggregate demand.

Ciaran – “The amount of money being created out of thin air is phenomenal.” That is a big statement. I’d make a sharp distinction about the kind of money that is being created, and where it goes, and where it may end up in good time. Money supply is not easy to analyse, and is full of traps for anyone that doesn’t have a very thorough understanding of the detailed mechanics. And it is getting harder, now that central bank operations are changing so rapidly, and differ so much from one market to another.
I believe the central bankers when they say can withdraw the liquidity in time. It will be hard, but possible. A simple indicator to watch is lending to the private sector. And we are very far from a recovery here, unfortunately.

Kevin – We can all agree that the world economy is contracting at breakneck speed. But I don’t see why you jump from that observation to see a need for yet a further mega macro boost. I’d be interested in seeing evidence that the origins of this crisis lies in a lack of aggregate demand Taylor HERE
warns precisely against that presumption. And he did go to the trouble of doing some numbers and writing a book on it, even if light (67 pages, big type)

Yes, sure. Germany, France and the NL, with surplus fiscal capacity, are increasing expenditure; The ECB has been recommending this, if in a discreet way in public. That will help save the eurozone. We are getting the boost, with budget deficits in core Europe shortly hitting the 5-7% vs GDP level. 10% here would obviously take Ireland off the hook. Already 5-7% seems remarkably generous to me. And yes, it is certainly not enough to get us out of the rut. That is because the problem is not aggregate demand in the first place.

The fiscal fragmentation in the eurozone would be far less evident if the UK had been a member. 10 years ago, it was not foreseen that the UK would be out so long.
Anthony Seldon’s biography HERE suggests we came very close to seeing sterling enter.

What do the following news stories have in common (all appeared in past 12 hours)?
– A focus in the media on the “failure” of the eurozone to support a US-led global reflation
– Fears of crowding out of private sector issuance by government
– A MW article on the ever weaker outlook for the USA’s sovereign rating.
– A Fed research paper *lauding* the salutatory effects of a currency crisis. HERE

Answer: fear of too much government spending.
I believe that the dampening of fears around the G20 (i.e. that it would see too much spending) set the backdrop for the Citi and uptick stories to fuel the rally in US stocks yesterday. Less government spending is seen as beneficial for risk appetite. Government intervention – some of it at least – has been fuelling risk aversion. I don’t think of myself as an ideologue on the issue of big government. Indeed I’d be in favour of some extreme redistribution policies. I do recognise that pragmatism drove much of the US interventions. With the benefit of hindsight, it is now far easier to argue that a good deal of the spending was ill thought out. So it is no surprise to see evidence from academics confirming, I think, what I see daily in the markets.


it’s good to hear you say clearly that in your view a lack of aggregate demand is not a problem today. That explains where you are coming from, and why you hold the views that you do.

The origins of the crisis are something that people will presumably debate for a good while to come. Global imbalances and crazy behaviour by financial institutions are presumably a big part of the answer. But even if asset bubbles, for example, were the origin, that would obviously not imply that aggregate demand is not a problem now, any more than the asset bubble of the 1920s implied that aggregate demand was not a problem during the Great Depression. Lots of people back then argued that expansionary macroeconomic policy would merely reignite bubbles and thus make things worse. They were as wrong then as their successors are wrong now. Their ability to block much-needed macroeconomic stimulus measures had tragic consequences for the world.

As you may know there is an ongoing debate in the United States between those like John Taylor who agree with you, and those like Paul Krugman who agree with me (or rather, I should say, with whom I agree). It will come as no surprise to you, I am sure, to learn that in my opinion Krugman, and the many many other leading economists who agree with him (some of whom have even written the odd book!!), are intellectually demolishing the opposition.

@ Ciaran
I think the difference between yourself and Kevin (and myself) is as Kevin points out in your perception of the role of aggregate demand in all this. To be careful about language, I agree, with you, that lack of aggregate demand was not a cause of this crisis. However I agree wholeheartedly with Kevin, that a lack of aggregate demand is the major consequence of the crisis, and as such must be tackled by those with the resources to do so, i.e. governments. The risks are there of provoking inflation, crowding out etc, but the risks of inaction are too great. To suggest otherwise is, as Martin Wolf maintains in the FT today, to side with the Mellonists – “liquidate labour, liquidate stocks, liquidate the farmers, liquidate real estate”. Peter Schiff, who you cited, is definitely in that Austrian camp. Are you?

Thanks for the Munchau German reference. Unfortunately my German is no better than yours. I do remain skeptical that the German government will either be able to convince its people to start spending much more, or to convince that same electorate to allow them to do so. Aside from memories of hyper-inflation, the demographics of the country and a looming pensions crisis, the fact that
My source on the China statements are articles on RGE Monitor, including by Michael Pettis. I don’t have any first-hand sense of how true what he and others are saying is.


I can see the logic in the Austrian argument for sure, whether they’re right or not, time will tell. They’ve been right in calling the crash before it happened but the issue now is whether the Keynesians are right given the current direction of policy. Hayek (nobel prize winner) strongly argued against Keynesianism.

I think a depression is locked in and the only issue is whether it is deflationary or inflationary. If inflationary (thru gov intervention) this may mitigate the pain, as Kevin suggests, but it will undoubtedly result in inflation and unemployment in the end and will have to be paid for.

Maybe the US can afford this and maybe they’ll be able to switch off the inflation and high government spending, we’ll see….

Peter Schiff is predicting failure

Comments are closed.