Categories Uncategorized Why Euro-Zone Chiefs Buck the Trend Currency Zone Defies Mainstream Economics Profession With Continued Controversial Policies Post author By Philip Lane Post date March 10, 2014 10 Comments on Why Euro-Zone Chiefs Buck the Trend Currency Zone Defies Mainstream Economics Profession With Continued Controversial Policies Simon Nixon writes in the WSJ here. Related ← Number of the Day → House of Debt 10 replies on “Why Euro-Zone Chiefs Buck the Trend Currency Zone Defies Mainstream Economics Profession With Continued Controversial Policies” “[Neo-Keynesian] models have consistently underestimated the recovery in Europe over the past year; estimates of Spanish GDP growth this year have doubled in six months to about 1% and some in the Spanish government now privately believe growth this year could hit 1.5%.” Estimates of growth have doubled, you say? Yes, from 0.5% to 1%! No shit! From Wikipedia’s entry on Neo-Keynesian economics: “Not to be confused with New Keynesian economics.” Sadly, asking Simon Nixon not to be confused is asking rather a lot. Better use a colon if you’re running the heading and subheading together like that. The notable aspect of the article is that packs a coherent analysis into a small space without omitting any major element. As the extract below illustrates, it also draws attention to the essential character of the crisis and the – shaky -political bargain underpinning the overall approach. The difference with the current “Washington Consensus” is a matter of political rather than economic appreciation or, as Merkel might put it, “solidarity in return for reform” (with indications under the new German government of acceptance that the need for reform is not confined to the countries in financial difficulty and includes Germany herself). “Indeed for many euro-zone policy makers, the risk that countries will abandon reforms outweighs the risks associated with low inflation. This is the key economic point of difference with the Washington Consensus. Of course, most Keynesians insist they recognize the importance of supply-side reforms—Ms. Lagarde referred to them in her speech last week. But throughout the crisis, many have tended to treat them as secondary to macroeconomic policy best left until the economy is stronger. But Europe’s structural rigidities aren’t a secondary issue. One reason why the recession was so deep is that rigid labor and product markets, excessive bureaucracy and inefficient justice systems prevented the reallocation of resources. As Greece’s central-bank governor, George Provopoulos, acknowledged in a speech last month, the reforms Greece has undertaken during the crisis have been overdue for decades. The reforms being discussed in France and Italy are equally overdue.” I think Simon Nixon’s article could have been boiled down to “Because they are ignorant sons of bitches.”. (let it through Prof Lane, let it through) @Kevin Donoghue I think you are being harsh on Simon Nixon here, not because he has more than a vague idea of what he is talking about, but because he has encapsulated the position of the ECB (and DG-austerity) rather neatly. The ECB is an unaccountable unapologetically political body with a right wing agenda and the willingness to use monetary policy (and any other methods available) to pursue that agenda. The Eurozone’s economy, democratic legitimacy and the general well-being of its citizens are secondary to the need to promote neoliberalism and embed it permanently in European and national law Years ago J W Mason wrote a terrific article about this “Pain Is the Agenda: The Method in the ECB’s Madness” which did much the same thing but the neoliberal dominance in the EU at all levels is such that is now OK for flacks to admit publicly that ECB policy has a political agenda, but that this is just fine since it is a sound one. This should help the debate. The Nixon article is a little bit unintentionally funny too: But Europe’s structural rigidities aren’t a secondary issue. One reason why the recession was so deep is that rigid labor and product markets, excessive bureaucracy and inefficient justice systems prevented the reallocation of resources. If you went outside the neoliberal cult it would be hard to find someone seriously suggesting that problems with excessive bureaucracy and inefficient justice systems (!?) are not secondary to austerity and low inflation and a host of other problems as an explanation for the depth and length of the European component of the global financial crisis. It is more a series of shibboleths than an analysis. These two links provide recent examples of the “solidarity” side of the political equation. The first relates to Latvia joining the ESM. http://www.neurope.eu/article/european-stability-mechanism-help-latvia-exit-crisis The second is Fitch’s rating of the ESM. http://www.reuters.com/article/2014/03/07/fitch-affirms-european-stability-mechani-idUSFit69246520140307 The text of the speech by the Governor of the Greek Central Bank to which Simon Nixon refers. http://www.bankofgreece.gr/Pages/en/Bank/News/Speeches/DispItem.aspx?Item_ID=292&List_ID=b2e9402e-db05-4166-9f09-e1b26a1c6f1b Another feature of the political deal is the necessity to pay back the loans advanced. The President of Portugal did not mince his words in this respect (H/t Eurointelligence). http://www.jornaldenegocios.pt/economia/ajuda_externa/detalhe/presidente_da_republica_avisa_que_pelo_menos_ate_2035_portugal_continuara_sujeito_a_supervisao.html Morgan Kelly (or Ireland’s Doctor Doom as he has been qualified by Alphaville) is of the view that the EZ has turned into a “debt collection agency”. The view has some validity. However, the message is rather if you borrow, whether as an individual or a state, you must expect to pay the amount back, with interest. A failure to do so has been demonstrated over the centuries to have rather disagreeable consequences. and so it begins….. http://uk.reuters.com/article/2014/03/10/markets-bonds-euro-idUKL6N0M71BO20140310 Wonder why Irish governance is so centralised? It’s because locally elected councillors could not be trusted to govern with prudence. The use of the one power they have – rezoning land for development – leaves a lot to be desired 😕 At national level, Noonan has suggested that income tax will be cut next October – he didn’t says overall tax would be reduced. There are still opportunities for stealth taxes. Governments rule to stay in power while that may not be in the interest of the currency union. Renzi seized power in Italy to shake up a sclerotic system. He could only succeed in such a situation with some external pressure from the centre – that is not suggesting that blunt targets should be observed. It’s the direction of movement that will count. Comments are closed.