Free non-sense – 1/2

TGS has a particular fascination for the unabashedly interventionist streak exhibited by the blog, ‘Free Exchange’ hosted by ‘The Economist’ newspaper. The philosophical underpinning of that blog is that there is no problem in the world that cannot be fixed by a little lower interest rate and a little more government spending. There is always room for a rate cut or or money printing or government stimulus.

TGS finds very little to commend in such views. They are safely ignored. These bloggers go silent when their preferred solutions do not work or when the catastrophe they predict without more stimulus does not happen. Take Europe, for example. Even this blogger was surprised to see the massive improvement in Greece’ overall fiscal position and primary fiscal balance in the last three years. Greece has not imploded socially. The Euro is strong. In fact, it has quietly re-staked its claim to be the global reserve currency. Very few are taking note or acknowledging it. China must be disappointed at the resurrection of the Euro.

Yes, a lot can go wrong still. It is one thing to be able to face a crisis and it is another thing to start to grow from here, when global growth impulses are weak, for various reasons. This blog has discussed them repeatedly. The world has borrowed too much from future growth – literally and otherwise. It has to pay back. The repeated downgrade, by international agencies, of their global growth forecasts proves the point.  Growth has to be ‘snatched’ from others. That requires a ‘beggar thy neighbour’ exchange rate policy. The Euro is too strong for its own good. Otherwise, a lot more pain will be required to be borne for peripheral Europe to achieve real (as opposed to nominal) competitive gains. That might be pushing the luck too far.

Anyway, TGS is digressing here. The point is that, including TGS, not many anticipated the Euro to be trading at 1.35 to a U.S. dollar in October 2013 or that Greece would be achieving a primary surplus.

If any one spots a Keynesian (where is Mr. Krugman?) acknowledging the European/German austerity ‘success’ (I am still prepared to concede the dangers of pushing austerity too far without the safety valves of global growth and a temporarily cheaper currency and hence the inverted commas), please bring it to my attention.

Now that this post has already taken too much space, I shall use the second part to comment on the specific topic of U.S. monetary policy on which ‘Free Exchange’ has held forth expansively in a recent post.



10 thoughts on “Free non-sense – 1/2

  1. I think austerity is a sine qua non when currency flexibility is either not feasible or undesirable. The European periphery falls in this category, and hence they took the pain and survived. The Eurozone as a whole would have been even better off, if there was more stimulus in Germany. Mind you there has been QE in Europe as well, and it has anchored the peripheries bond yields at an “agreeable” level. The crucial difference is that the QE here has been sterilised by the ECB.

    In other areas, frankly I have been completely puzzled by the UK where austerity backed by monetary easing has been counterprodictive. You have an intereting post on this with several snippets from the FT. But, Japan probably provides the most interesting case of testing the boundaries of monetization to revive ‘animal spirits,’ This excerise had better be successful, or rest NE Asia is toast if Abenomics fails, And, in which case, the Yen will go hell and a hand basket.


  2. While not being an economist, one needs to point out that Greece still has unemployment of nearly 25% (with youth unemployment in the stratosphere at nearly 60%) & the sovereign debt burden still projected to be very high, even after all this austerity. Also, the ECB got religion late but nevertheless, on monetary easing through OMT, which played a substantial on the periphery’s recovery. If achieving primary surplus on the backs of citizens who might not be able to shoulder this burden without impairing their long-term productivity & financial security, over 6 odd years, is a success (especially when other options were available which were utilized late or never), then great, yea austerity.
    I think your skepticism is correct & healthy about this recovery, About Krugman, yeah he too needs to tone down, but his bad manners aren’t reason enough to think his pronouncements are equally bad. And yes, now the Fed in indeed pushing on a string, but they’ve done what needed to be done.


  3. “Even this blogger was surprised to see the massive improvement in Greece’ overall fiscal position and primary fiscal balance in the last three years. Greece has not imploded socially. The Euro is strong. In fact, it has quietly re-staked its claim to be the global reserve currency. Very few are taking note or acknowledging it. ”

    If memory serves me right, we had a some interesting debates on this blog about Euro exits, devaluations, two track currency solutions for the Euro versus Merkel successfully imposing austerity on the Periphery and the Euro holds. I think the latter has more or less been successful in achieving stabilization.

    See this link (which is still listed on TGS as “most popular”):

    Of course there is scope for skepticism about growth sustainability as the periphery still has to demonstrate real, as opposed to nominal, productivity gains as you pointed out. But it is a good starting point, and political risks within Europe are easing. Nonetheless, the biggest risk is the shift in Europe’s total CA position to one of a surplus. Which simply highlights the fundamental adjustment which is being pushed on to the rest of the world.




    1. Good stuff, Andy. Events since that blog post of 2012 have vindicated your arguments that Europe would rather endure painful real adjustment than break it up into two blocs or more, etc. Congratulations.

      But, something in me keeps wondering if it is all too good to be true. That can, of course, be put down to two factors: one is that I am trying to look for scapegoats for being sceptical of the real adjustment in Europe. Second, I could be sceptical because how some of these European countries faked their way into the monetary union in the first place.

      That aside, in general, this blog has been more sympathetic, warts and caveats and all, to the ‘pro-austerity’ camp than to the ‘spend your way out of the problem’. I thought austerity would be bearable if there was a safety valve. The Euro did not prove to be one and yet austerity appears to have worked. In Asia, after the 1997-98 crisis, IMF imposed austerity was counterbalanced by massive currency depreciation/devaluation. Further, the World economy grew strongly in 1999-2000. Asia got out of jail briefly before the tech. bubble collapse and 9/11 again reversed the economic momentum. Peripheral Europe has managed without all these support systems!? Fascinating and intriguing.


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