Simon Johnson is having fun with the sayings of Peer Steinbrück over at the Baseline Scenario, but the German Finance Minister is facing stiff competition from Franz Muentefering, who apparently showed up at an unemployment rally simultaneously saying that “We must do all we can at the moment to protect jobs” and that “There will be no third stimulus package”. Talk about chutzpah.
Speaking of stimulus packages, the latest IMF Regional Economic Outlook for Europe makes some interesting points about the size of fiscal multipliers at times like this:
In general, econometric analysis tends to back skepticism regarding the effectiveness of
discretionary fiscal actions by documenting a trend of small and declining consumption multipliers since
the 1980s, as greater financial deregulation, larger wealth accumulation, and better policies that might
have helped lower uncertainty about future income, relax credit constraints on households and firms,
and lengthen private sectors planning horizons. Because of the enhanced opportunities to smooth
consumption vis-à-vis temporary fluctuations in income and diversify income risks, household demand is likely to have become—over time—less and less dependent on current income, thereby shaking the foundations of fiscal multipliers.
In the current slowdown, however, it seems that this argument can be run in reverse. As the financial
turmoil is spreading across borders and across asset classes, the share of credit-constrained households is likely to rise and the planning horizon of credit-unconstrained consumers to shorten. Similarly, the correction of housing prices is bound to lower the value of the collateral that households in many European economies can count on to borrow. For all these reasons, spending patterns would become much more dependent on current income, thus boosting the effectiveness of any tax cut and/or transfer increase. Thus, while in normal circumstances a discretionary fiscal stimulus might
have limited impact, in the current economic conditions the case for fiscal action seems to have
become stronger, giving reasons to believe that the multipliers would be closer to the upper bound of
the range of estimates provided above.
The IMF also stresses, as you would expect, the virtues of a coordinated approach to fiscal policy, given the positive externalities involved in stimulus packages. Indeed, the need for greater European coordination is a theme running throughout the report, and that seems absolutely right. The fragmentation of our regulatory, banking and fiscal systems is an important reason to be pessimistic about Europe, and you would think this would provide a ready-made theme for European election candidates to talk about.
Some European politicians, like Daniel Cohn-Bendit, are trying to get a European debate going, but I suppose most countries’ elections will be like ours, focussed on national issues. What a wasted opportunity, at such a critical juncture for the continent.