Leaks in the Dam?
Interesting things happened this morning. I assisted to one of the presentations of the OECD interim assessment. There is nothing very new in the assessment, that concerning the eurozone, can be summarized as follows
- The outlook remains negative (while the rest of the OECD countries are doing better)
- There is still room for monetary accommodation
- This monetary accommodation may not benefit the countries that need it more, because the transmission mechanism of monetary policy is still not fully working
- The Cyprus incident shows that there is a desperate (this I added) need of a fully fledged banking union
- EMU countries need to continue on the path of fiscal stabilization, even if automatic stabilizers should be allowed to fully play their role, even at the price of missing nominal targets
To summarize, the OECD depicts a mixed picture in what concerns macroeconomic policy, notably in calling for more monetary easing (it is difficult to disagree, even if I am unsure there will be major effects), and abandoning the mantra of nominal targets.
But the interesting part is what came later. The assessment recognizes that the eurozone as a whole does not have a serious debt problem, as shown by this figure (taken from the presentation)
Furthermore, and more important, the OECD recognizes that the eurozone rebalancing so far happened mostly (only, I would say) on the periphery side, and mostly through a reduction of imports induced by the recession. The core surplus countries barely adjusted:
Then the question came natural, and I dared to ask: If the eurozone as a whole is not in a situation of public finances’ distress; and if the adjustment so far fell on the shoulders of peripheral countries, does that mean that the OECD would go as far as suggesting that Germany and other core countries, that have the room for manoeuvre, should implement expansionary policies? The answer by the presenter was intriguing:
- The major role for fiscal policy should be through automatic stabilization
- Germany and other core countries should implement structural reforms aimed at boosting domestic demand (such as reforming the services’ sector, thus triggering more investment
- And then, if there is room for further action, we’ll see…
Maybe because we have been flooded with bad news, lately, and we desperately need to think differently; but I like to see that “we’ll see” as a leak in the dam.