Author: Kevin O’Rourke

Today’s exam question

In honour of the fine examination weather we are having these days:

According to this morning’s Eurointelligence,

The Eurogroup will analyze to what extent past imbalances contribute to the current low growth, according to an unnamed Eurogroup official, and also whether Spain’s large current account deficit prior to the crisis can be attributed to the housing bubble, inappropriate banking supervision, or lax credit standards.

Does it make sense to attribute Spain’s current account deficit to Spanish policies alone? Be explicit about the theoretical and empirical assumptions you are making.

Three things all serious people know are true

A holy trinity — or perhaps a troika? — of beliefs has guided policy since 2010. These are that austerity is expansionary; that the sky will fall in if ever the debt to GDP ratio exceeds 90%; and that the way to do austerity is to cut expenditure rather than raise taxes.

All of which is very convenient if what you really want to do is shrink the state.

We know how well the first two nostrums have performed when confronted with empirical evidence, so you might think that people would be just a wee bit cautious about stating the third as gospel truth. But no, here is Mario Draghi:

First, fiscal consolidation should be based on reductions in current expenditure rather than increases in taxes. Unfortunately, many of the fiscal consolidation measures were implemented in an emergency situation, with most governments choosing the simplest route, which was to raise taxes. And here we are talking about raising taxes in an area of the world where taxes are already very high, so it is no wonder that this had a contractionary effect.

Paul Krugman helpfully reminds us where this belief came from, and what happened next. The ECB is constantly telling us that it has a narrowly restricted mandate, with its primary concern being inflation. In that case, then surely the least that we are entitled to expect is that it keeps its views about the composition of fiscal adjustments to itself?

Trust in the EU, again

It has been evident for quite some time that citizens right across Europe are losing faith in the European Union, and the fact is making the headlines today. If the Euro experiment needs meaningful banking union, including some element of fiscal union, and probably other “deepening” reforms as well in order to survive, and if citizens are becoming increasingly hostile to “Europe”, meaning that such reforms are politically impossible, then the Euro may be doomed in the long run. In the meantime the never-ending Eurozone crisis, caused by a flawed currency, a dysfunctional central bank, and a perverse macroeconomic policy response, is dragging the entire European project down with it.

Update: bang on cue, Spain’s unemployment rate has reached 27 percent this morning. Solving the periphery’s economic problems rather than saving the Euro really has to become the continent’s top priority. Apart from anything else, you won’t be able to do the latter if you don’t do the former.

Lies, damn lies, and statistics

Rarely have statistics been misused so much for political purposes as when recently the ECB published the results of a survey of household wealth in the Eurozone countries.

Thus begins a new column by Paul De Grauwe and Yuemei Ji, which points out, inter alia, that the median household wealth statistics currently being used by some German economists and commentators to justify future wealth grabs in the Eurozone periphery are in fact telling us something important about German inequality.

But it gets worse. Tim Worstall (H/T Eurointelligence) quotes the ECB report as follows:

2.2.3 VOLUNTARY PRIVATE PENSIONS/WHOLE LIFE INSURANCE
This section shows how households save for retirement using voluntary private pension
plans and/or whole life insurance contracts. Public pensions and occupational pension plans
are not considered in this report, as the value of some public pensions and occupational pension plans can be difficult for households to evaluate. Cross-country comparisons are challenging in the sense that institutional arrangements across countries with respect to the different modes of retirement savings, such as voluntary private versus public or occupational, can be quite substantial. A deeper analysis of these differences falls outside the scope of this report.

As Worstall says, this means that many households’ major asset is being excluded, essentially on the grounds that including them would be really rather difficult.

Time for the report to be consigned to the dustbin, surely, and for those people currently abusing it to spend even five minutes or so reflecting on what the likely political impact would be if their proposals were implemented.

Soros on the crisis

George Soros’ recent speech on the eurozone is available here.