Author: Kevin O’Rourke

More G-20 bickering

The BBC and several other media report continuing Franco-German opposition to the calls by the US administration, the president of the World Bank, and many others, for the coordinated global fiscal expansion that would seem to be essential at this time. Irish auditors will however be interested in the following from Larry Summers:

“There are some for whom it would be imprudent,” he said, noting that the crisis-hit countries in eastern Europe – which have large foreign currency debts – could not increase spending. “But for a very large majority of the world economy, [a fiscal expansion] is appropriate.”

The BBC further reports:

But European governments have indicated they are unlikely to strain their finances by agreeing to much more spending until they have seen some results from the first round of stimulus programmes already launched, says our correspondent.

Now, if accurate, this report raises some fascinating questions. Given the lags involved with macroeconomic policy, how long a wait would this imply, even if the fiscal stimuli worked according to a Keynesian textbook plan? And what would such a wait then imply for the health of the economy? And, given that the stimuli are small, and that the contraction in the economy is enormous, what sort of ‘results’ is it realistic to expect? I would have thought that the results will be purely counterfactual — the economy will shrink less than would otherwise be the case. In that case the ‘results’ would have to be guaged with reference to the predictions of some model of the economy. Is that what is meant here? Or, are the governments concerned hoping that the stimuli will lead to an actual increase in GDP? And if so, are they implicitly ruling out further fiscal stimuli unless the economy stops shrinking?

Now, that would be an interesting policy stance.

Oh, and a happy St Patrick’s Day weekend to everyone.

Quote for the day

“We have reached our limits,” said Axel Weber, president of Germany’s Bundesbank, in Frankfurt on Tuesday. “The expectation that we could neutralise this ­synchronised recession through short-term fiscal policy measures is false. We should not even try. There will be costs.”

From this. Apparently they think that the SGP is the key to preserving monetary union, rather than, say, preventing mass unemployment.

For those of us in secure employment, this is shaping up to becoming a fascinating natural experiment in applied political economy.

Update: Christina Romer has a very nice introduction to the lessons of the Great Depression for today’s policy makers here.

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?

The passions and the interests

L’Homme est instinctivement protectionniste et seule la raison le pousse au libre-échange.

(Celso Amorim, Brazilian foreign minister, in today’s Le Monde.)

Politics for beginners

Ireland is a small country with a very odd political system, and so we don’t necessarily expect our politicians to be economic experts.

We do however expect them to get the politics right.

The title of this post comes from a piece by Brendan Keenan in yesterday’s Sunday Independent, in which he adds his voice to the growing calls for a broad-based and front-loaded approach to solving the state’s financial crisis. I fully understand the initial reluctance by the government to take too much demand out of the economy too early, but as Philip, Patrick and others have pointed out, growing levels of uncertainty may be doing more damage to consumer spending at this stage than would be associated with the increase in taxes that everyone knows is going to have to take place sooner or later. And clearly demonstrating that the government is in control of the state’s finances is important, not just in its own right, but because of the implications for the credibility of the bank guarantee.

To these economic arguments can be added a political one that is to my mind equally compelling: trying to solve the fiscal crisis in a piecemeal manner will be politically extremely difficult, if not impossible. As Jeff Sachs used to say in a very different context long ago, you can’t cross a chasm in a series of short steps.