The Lost Consistency of European Policy Makers
Just a quick note on something that went surprisingly unnoticed so far. After Draghi’s speech in Jackson Hole, a new consensus seems to have developed among European policy makers, based on three propositions:
- Europe suffers from deficient aggregate demand
- Monetary policy has lost traction
- Investment is key, both as a countercyclical support for growth, and to sustain potential growth in the medium run
My first reaction is, well, welcome to the club! Some of us have been saying this for a while (here is the link to a chat, in French, I had with Le Monde readers in June 2009). But hey, better late than never! It is nice that we all share the diagnosis on the Eurocrisis. I don’t feel lonely anymore.
What is interesting, nevertheless, is that while the diagnosis has changed, the policy prescriptions have not (this is why I failed to share the widespread excitement that followed Jackson Hole). Think about it. Once upon a time we had the Berlin View, arguing that the crisis was due to fiscal profligacy and insufficient flexibility of the economy. From the diagnosis followed the medicine: austerity and structural reforms, to restore confidence, competitiveness, and private spending.
Today we have a different diagnosis: the economy is in a liquidity trap, and spending stagnates because of insufficient expected demand. And the recipe is… austerity and structural reforms, to restore confidence, competitiveness, and private spending (in case you wonder, yes, I have copied-pasted from above).
Just as an example among many, here is a short passage from Mario Draghi’s latest audition at the European Parliament, a couple of weeks back:
Let me add however that the success of our measures critically depends on a number of factors outside of the realm of monetary policy. Courageous structural reforms and improvements in the competitiveness of the corporate sector are key to improving business environment. This would foster the urgently needed investment and create greater demand for credit. Structural reforms thus crucially complement the ECB’s accommodative monetary policy stance and further empower the effective transmission of monetary policy. As I have indicated now at several occasions, no monetary – and also no fiscal – stimulus can ever have a meaningful effect without such structural reforms. The crisis will only be over when full confidence returns in the real economy and in particular in the capacity and willingness of firms to take risks, to invest, and to create jobs. This depends on a variety of factors, including our monetary policy but also, and even most importantly, the implementation of structural reforms, upholding the credibility of the fiscal framework, and the strengthening of euro area governance.
This is terrible for European policy makers. They completely lost control over their discourse, whose inconsistency is constantly exposed whenever they speak publicly. I just had a first hand example yesterday, listening at the speech of French Finance Minister Michel Sapin at the Columbia Center for Global Governance conference on the role of the State (more on that in the near future): he was able to argue, in the time span of 4-5 minutes, that (a) the problem is aggregate demand, and that (b) France is doing the right thing as witnessed by the halving of structural deficits since 2012. How (a) can go with (b), was left for the startled audience to figure out.
Terrible for European policy makers, I said. But maybe not for the European economy. Who knows, this blatant contradiction may sometimes lead to adapting the discourse, and to advocate solutions to the deflationary threat that are consistent with the post Jackson Hole consensus. Maybe. Or maybe not.