Archive for the ‘Growth’ Category

Convergence, Where Art Thou?

September 2, 2015 2 comments

A new Occasional Paper details the new methodology adopted by the Bank of Italy for calculating an index of price competitiveness, and applies it to the four largest eurozone economies.

I took the time to copy the numbers of table 3 in an excel file (let’s hope for the best), and to look at what happened since 2009. Here is the evolution of price competitiveness (a decrease means improved competitiveness):


I find this intriguing. We have been sold the story of Spain as the success story for EMU austerity as, contrary to other countries, it restored its external balance through internal devaluation. Well, apparently not. Since 2008 its price competitiveness improved, but less so than in the three other major EMU countries.

The reason must be that the rebalancing was internal to the eurozone, so that the figure does not in fact go against austerity nor internal devaluation. For sure, within eurozone price competitiveness improved for Spain. Well, think again…


This is indeed puzzling, and goes against anedoctical evidence. We’ll have to wait for the new methodology to be scrutinized by other researchers before making too much of this. But as it stands, it tells a different story from what we read all over the places. Spain’s current account improvement can hardly be related to an improvement in its price competitiveness. Likewise, by looking at France’s evolution, it is hard to argue that its current account problems are determined by price dynamics.

Without wanting to draw too much from a couple of time series, I would say that reforms in crisis countries should focus on boosting non-price competitiveness, rather than on reducing costs (in particular labour costs). And the thing is, some of these reforms may actually need increased public spending, for example in infrastructures, or in enhancing public administration’s efficiency. To accompany these reforms there is more to macroeconomic policy than just reducing taxes and at the same time cutting expenditure.

Since 2010 it ha been taken for granted that reforms and austerity should go hand in hand. This is one of the reasons for the policy disaster we lived. We really need to better understand the relationship between supply side policies and macroeconomic management. I see little or no debate on this, and I find it worrisome.

Reform or Perish

June 19, 2015 2 comments

Very busy period. Plus, it is kind of tiresome to comment daily ups and downs of the negotiation between Greece and the Troika Institutions.

But as yesterday we made another step towards Grexit, it struck me how close the two sides are on the most controversial issue, primary surplus. Greece conceded to the creditors’ demand of a 1% surplus in 2015, and there still is a difference on the target for 2016, of about 0.5% (around 900 millions). Just look at how often most countries, not just Greece, respected their targets in the past, and you’ll understand how this does not look like a difference impossible to bridge.

The remaining issue is reforms. Creditors argue that Greece cannot be trusted in its commitment to reform. After all, they cheated so often in the past… In particular, creditors point at one of Syriza’s red lines, the refusal to touch pension reforms, as proof that the country is structurally incapable of reform. And here is the proof, the percentage of GDP that crisis countries spent in welfare::


I took total social expenditure that bundles together pensions, expenditure for supporting families, labour market policies, and so on and so forth. All these expenditure that, according to the Berlin View, choke the animal spirits of the economy, and kill productivity.

Well, Greece does not do much worse than its fellow crisis economies, but it is true that it is hard to detect a downward trend. The reform effort was not very strong, and certaiinly not adapted to an economy undergoing such a terrible crisis. The very fact that after four years of adjustment program the country spends 24% of its GDP in social protection, is a proof that it cannot be trusted.This is just proof that, once more, the Greek made fun of their fellow Europeans, and that they want us to pay for their pensions.

Hold on. Did I just say “terrible crisis”? What was that story of ratios, denominators and numerators? The ratio is today at the same level as 2009. But what about actual expenditure? There is a vary simple way to check for this. Multiply each of the lines above for the value of GDP. Here is what you get (normalized at 2009=100, as country sizes are too different):


The picture looks quite different, does it? Greece, whose crisis was significantly worse than for the other countries, slashed social expenditure by 25% in 5 years (I know, I know, it is current expenditure. I am too busy to deflate the figure. But I challenge you to prove that things would be substantially different). Now, just in case you had not noticed, social expenditure has an important role as an automatic stabilizer: It supports incomes, thus making hardship more bearable, and lying the foundations for the recovery. In a crisis the line should go up, not down. This picture is yet another illustration of the Greek tragedy, and of the stupidity of the policies that the Troika insists on imposing. By the way, notice how expenditure increased from 2005 to 2009, in response to the global financial crisis. A further proof that sensible policies were implemented in the early phase of the crisis, and that we went berserk only in the second phase.

Ah, and of course virtuous Germany, the model we should all follow, is the black line. Do what I say…

One may object that focusing on expenditure is misleading. There is more than expenditure in assessing the burden of the welfare state on the economy. While Greece slashed spending, its welfare state did not become any better; its capacity to collect taxes did not improve, that its inefficient public administration and its crony capitalism are stronger than ever. Yes, somebody may object all that. That someone is Yanis Varoufakis, who is demanding precisely this: stop asking that Greece slashes spending, and lift the financial constraint that prevents any meaningful medium term reform effort. Reform is not just cutting expenditure. Reform is reorganization of the administrative machine, elimination of wasteful programs, redesigning of incentives. All that is a billion times harder to do for a government that spends all its energies finding money to pay its debt.

Real reform is a medium term objective that needs time, and sometimes resources. In a sentence, reform should stop being associated with austerity.

But hey, I am no finance minister. Just sayin’…


The IMF: Of Words and Actions

May 22, 2015 1 comment

Some comments, and endless twitter discussions on my Blanchard Touch post call for a couple of clarifications.

The first has to do to the most common reaction, that has been: “the IMF may well have made advances in its analysis, but the policy prescriptions are remarkably unchanged. So what good is it?” After all, isn’t the IMF considered an hardliner in the current Troika Institutions‘ negotiation with Greece? No Blanchard touch, there.

These objections are of course justified, but in my opinion they miss an important point: Blanchard is not the IMF executive director. Nor the representative of  a major country. He is “only” the head of the research department, and as such his job is to provide analyses, not to decide the use of these analyses made by a process that (luckily) is political in nature. Does this mean that what Blanchard and his staff do is irrelevant? Of course not. I do think that making the debate evolve is a fundamental task for public figures like Blanchard. One of the strength of the Washington Consensus has been the narrative that accompanied it, the market efficiency hypothesis that laid the theoretical foundations of supply side policies. This is why I believe that the fact that the narrative is crumbling, among other things thanks to the IMF own research, is of paramount importance. The change in narrative is a precondition for a policy change. The hiatus between the Fund’s actions and words will be increasingly visible, and eventually, I hope, it will lead to a change of policies. I cannot believe that the narrative is irrelevant; otherwise I would have chosen a different job.

The second clarification concerns the end of my post:

If I write a paper saying that austerity will not be costly because multipliers are 0.5, and 2 years later retract my previous statement and argue that austerity is in fact self defeating, the impact on the world is zero. If the IMF does the same, during the two years huge suffering will be needlessly inflicted to masses of people. This poses a problem, as research by definition may be falsified. In the past an institution like the IMF would never have admitted a mistake. And we certainly do not want to go back there. Today they do admit the mistakes, but the suffering remains. The only way out to this problem is that the “new” IMF should learn to be cautious in its policy prescriptions, and always remember that any policy recommendation is bound to be sooner or later proven inappropriate by new data and research. We don’t live in a black and white world. Adopting a more prudent stance in dictating policies  would be wise (in Brussels as well, it goes without saying)

By this I surely did not mean that the IMF should refrain from giving policy advice. Nor that governments should follow their guts instead of informed analysis, as one reader very clearly put it. I meant that the first and most important achievement for a policy adviser is to abandon dogmatism, and acknowledge that however robust we believe our knowledge to be, there always is a chance that it will be proved wrong. With such an attitude, policy advice would become “cautious” in the sense of being aware of possible unintended consequences of policies; policies that should therefore be implemented with in mind alternative scenarios. Just to make an example, the IMF could have suggested, as it did, to implement austerity based on the belief that the multiplier was low. But it should have asked governments to do it gradually, in order to be ready to reverse course in case the estimated multipliers would prove (as it did) to be larger. In a sentence, being cautious means avoiding advising for extreme behaviors that could prove to be extremely costly and hard to unwind. Especially in crisis situations, policy makers should look east and cross the river by feeling the stones.

I would also like to add that in the case of the Washington Consensus, we had already, in the past decade, a number of episodes when its prescriptions turned out to be catastrophic. Thus, caution would have been even wiser. But hey, dogmatism is by definition unwise…

The Blanchard Touch

April 15, 2015 10 comments

Yesterday I commented on the intriguing box in which the IMF staff challenges one of the tenets of the Washington consensus, the link between labour market reform and economic performance.
But the IMF is not new to these reassessments. In fact over the past three years research coming from the fund has increasingly challenged the orthodoxy that still shapes European policy making:

  1. First, there was the widely discussed mea culpa in the October 2012 World Economic Outlook, when the IMF staff basically disavowed their own previous estimates of the size of multipliers, and in doing so they certified that austerity could not, and would not work (of course this led EU leaders to immediately rush to do more of the same).
  2. Then, the Fund tackled the issue of income inequality, and broke another taboo, i.e. the dichotomy  between  fairness and efficiency. Turns out that unequal societies tend to perform less well, and IMF staff research reached the same conclusion. And once the gates opened, it did not stop. The paper by Berg and Ostry was widely read. Then we had Ball et al on the distributional effects of fiscal consolidation (surprise, it increases inequality). Another paper investigated the channels for this link, highlighting how consolidation leads to increased inequality mostly via unemployment. And just last week I assisted to a presentation by IMF economists showing how austerity and inequality are positively related with political instability.
  3. On labour markets, before yesterday’s box 3.5, the Fund had disseminated research linking increased inequality with the decline in unionization.
  4. Then, of course, the “public Investment is a free lunch” chapter three of the World Economic Outlook, in the fall 2014.
  5. In between, they demolished another building block of the Washington Consensus: free capital movements may sometimes be destabilizing…

These results are not surprising per se. All of these issues are highly controversial, so it is obvious that research does not find unequivocal support for a particular view. All the more so if that view, like the Washington Consensus, is pretty much an ideological construction. Yet, the fact that research coming from the center of the empire acknowledges that the world is complex, and interactions among agents goes well beyond the working of efficient markets, is in my opinion quite something.

What does this mass (yes, now it can be called a mass) of work tells us? Three things, I would say. First, fiscal policy is back. it really is. The Washington Consensus does not exist anymore, at least in Washington. Be it because the multipliers are large, or because it has an impact on income distribution (and on economic efficiency); or again because public investment boosts growth, fiscal policy has a role to play both in dampening business cycle fluctuations and in facilitating stable and balanced long term growth. The fact that a large institution like the IMF has lent its support to this revival of consideration for fiscal policy, makes me hope that discussions about macroeconomic policy will be less ideological, even once the crisis will have passed.

The second thing I learn is that the IMF research department proves to be populated of true researchers, who continuously challenge and test their own views, and are not afraid of u-turns if their own research dictates them. I am sure it has always been the case. What is different from the past is that now they have a chief economist who seems more interested in understanding where the world goes than in preaching a doctrine.

The third remark is more problematic. If I write a paper saying that austerity will not be costly because multipliers are 0.5, and 2 years later retract my previous statement and argue that austerity is in fact self defeating, the impact on the world is zero. If the IMF does the same, during the two years huge suffering will be needlessly inflicted to masses of people. This poses a problem, as research by definition may be falsified. In the past an institution like the IMF would never have admitted a mistake. And we certainly do not want to go back there. Today they do admit the mistakes, but the suffering remains. The only way out to this problem is that the “new” IMF should learn to be cautious in its policy prescriptions, and always remember that any policy recommendation is bound to be sooner or later proven inappropriate by new data and research. We don’t live in a black and white world. Adopting a more prudent stance in dictating policies  would be wise (in Brussels as well, it goes without saying). And of course, the disconnect between the army and the general is also a problem.

What Structural Reforms?

April 14, 2015 2 comments

I am ready to bet that the latest IMF World Economic Outlook, that was presented today in Washington, will make a certain buzz for a box. It is box 3.5, at page 36 of chapter 3, which has been available on the website for a few days now. In that box, the IMF staff presents lack of evidence on the relationship between structural reforms and total factor productivity, the proxy for long term growth and competitiveness. (Interestingly enough people at the IMF tend to put their most controversial findings in boxes, as if they wanted to bind them).

What is certainly going to stir controversy is the finding that while long term growth is negatively affected by product market regulation, excessive labour market regulation does not hamper long term performance.

It is not the first time that the IMF surprises us with interesting analysis that goes against its own previous conventional wisdom. I will write more about this shortly. Here I just want to remark how these findings are relevant for our old continent.

The austerity imposed to embraced by eurozone crisis countries has taken the shape of expenditure cuts and labour market deregulation, whose magic effects on growth and competitiveness have been sold to reluctant and exhausted populations as the path to a bright future. I already noted, two years ago, that the short-run pain was slowly evolving into long-run pain as well, and that the gain of structural reforms was nowhere to be seen. The IMF tells us, today, that this was to be expected.

The guy who should be happy is Alexis Tsipras; he has been resisting since January pressure from his peers (and the Troika, that includes IMF staff!) to further curb labour market regulations, and recently presented a list of reforms that mostly pledges to reduce crony capitalism, tax evasion and product market rigidities. Exactly what the IMF shows to be effective in boosting growth. Of course, at the opposite, those who spent their political capital to implement labour market reforms are most probably not rejoicing at the IMF findings.

This happens in Washington. Problem is, Greece, and Europe at large, seem to be light years away from the IMF research department. We already saw, for example with the mea culpa on multipliers, that IMF staff in program countries does not necessarily read what is written at home. Let’s see whether the discussion on Greece’s reforms will mark a realignment between the Fund’s research work and the prescriptions they implement/suggest/impose on the ground.

Commission Forecasts Watch – November 2014 Edition

November 4, 2014 1 comment

Update (11/10): Well, I typed a few numbers wrong,  for France and Finland (thanks to Tadej Kotnik for pointing this out). I corrected the data, and stroke down the remarks on Finland that with the corrected data does not beat the expectations. Apologies to the readers

Today the Commission issued its Autumn forecast. It is therefore time to update my forecast watch. Here it is:


Last March, my crystal ball gave me a forecasted growth  of 0.55% for the EMU, while the Commission forecasted 1.2% (In March it was 1.1% but it had then been revised in May). As of today (if things do not get worse, in which case I will be even closer), my forecast error is -0.25%, and the Commission’s is +0.4% I win, the Commission loses.

After 2013, when they were remarkably close, Commission forecasts seem to have diverged once more, at least last Spring. We’ll have to see what the final figure for 2014 is (My crystal ball forecast update gives 0.65%).

But besides playing with numbers, the interesting thing about this year’s Autumn forecasts, is that growth has been revised downwards especially for core countries.


In particular since last Spring the mood has changed about Germany, whose growth forecast has been slashed of 0.5% for 2014 (in just a few months, it is worth reminding it), and of 0.9% (almost halved) for 2015. Also interestingly, the only core country whose expectations have been revised upwards, Finland, is also the only one that got rid of its excess savings and current account surplus.

We all know that the disappointing performance of Germany is due, mostly, to geopolitical uncertainty and low growth in emerging economies. When will our German friends understand that putting all eggs in the basket of foreign demand is risky?

The Lost Consistency of European Policy Makers

October 6, 2014 6 comments

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.