#Draghi sought to talk down the euro exchange rate to improve competitiveness. But Japan and China also want competitive exchange rates to spur export growth, and the eurozone already runs a current-account #surplus. The #German model of export-led growth #cannot work for the eurozone as a whole. Structural reform is certainly needed in some countries to increase #long-term growth potential; but the #impact of structural reform on short-term growth is often negative. The eurozone needs higher #domestic demand to escape the debt overhang left behind by pre-crisis excess. In countries such as Spain and Ireland, private debts grew to unsustainable levels. In others, such as Greece and Italy, public debt also was too high. Household consumption, business investment, and public expenditure have all been #cut in an attempt to pay down #debt. ------------------------------------------------- Should we admit that possibility (central bank bond purchases) explicitly in advance? The argument in favor is that failure to do so would raise fears about how increased public debt would ever be repaid, or about how the ECB would “exit” from a swollen balance sheet, in turn undermining the stimulative impact of fiscal and monetary coordination. The argument against is #moral hazard: *** If we admit that modest ECB-financed deficits are possible and appropriate now, what will prevent politicians and electorates from demanding large and inflationary ECB-financed deficits on other occasions? *** The #political risks are certainly great. #Optimal policy may therefore require a non-transparent fudge; monetary and fiscal “coordination” might mean, after the fact, #permanent_monetary_finance, but #without ever openly admitting that possibility. But, fudge or not, #Draghi has moved the debate forward dramatically. Without a greater role for fiscal policy, the #eurozone will face either continued slow growth or an eventual breakup social-europe.eu/2014/09/facing-reality-eurozone/
Posted on: Mon, 15 Sep 2014 14:04:49 +0000
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