Sunday, August 24, 2014

Krugman and Wren-Lewis on Draghi at Jackson Hole

The bottom line:

The point is that even if Draghi is, as I believe he is, a good man and a good economist who gets the situation, the combination of the euro’s structure and the intransigence of the austerians means that the situation remains very grim.
Wren-Lewis agrees, sort of, with a key caveat:

Should we celebrate the fact that Draghi is now changing the ECB’s tune, and calling for fiscal expansion? The answer is of course yes, because it may begin to break the hold of balanced-budget fundamentalism on the rest of the policy making elite in the Eurozone. However we also need to recognise its limitations and dangers. As the third sentence of the quote above indicates, Draghi is only talking about flexibility within the Stability and Growth Pact rules, and these rules are the big problem.
Emphasis added.

And throw another Nobel laureate into the mix:

With unemployment at near-record heights in many depressed European economies, it is “totally indefensible” to argue that stimulus policies are not needed to get the jobless back to work, according to Peter Diamond, the MIT professor who won his Nobel prize in economics in 2010 for his work on labour-market mismatch. Professor Diamond’s work has been extremely influential in shaping the approach of the European Commission and many EU governments to tackling unemployment, which focuses on “active labour-market policies”, such as job retraining and other help in matching workers to vacancies. But such is the shortfall of demand in Europe, and to a lesser extent the United States, that there is plenty of labour-market slack that better matching of workers to jobs cannot hope to reduce.


George Ross said...

Draghi softens a bit, but he has always been flexible. Will the Germans soften, however, now that their ten minutes of global fame are over? Then, and only then, can the Commission give up it's crusade for SGP virtue. In all this, one prediction. Hollande is cooked. Then what?

Anonymous said...

True, but it's also not all about Germany. Its monetary policy allies have agency of their own, and they could begin to break with the German position. By focusing solely on Germany, one ends up letting other European governments and national central banks off the hook.