QE is Europe’s “Last Best Hope,” – If One Ignores the First, Best Hope

By William K. Black
Bloomington, MN: January 23, 2015

It’s the curse of the commentator on commentators. I recently wrote nice things about Neil Irwin’s New York Times column about the Eurozone. On January 22, 2015, he wrote a column about the ECB’s adoption of quantitative easing (QE), that claimed it was “last, best hope” for the Eurozone. In fairness to Irwin, his column contains plenty of skepticism as to whether QE is even a poor “hope” for the Eurozone. Irwin also has the right quotation from Mario Draghi, the head of the ECB.

“Mr. Draghi acknowledged that it would take more than an open spigot of money from the central bank to get Europe’s economy on track, and that political authorities across Europe must act as well. ‘What monetary policy can do is to create the basis for growth,’ he said at a news conference in Frankfurt. ‘But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.’”

Yes, Draghi, seven years after the onset of the EU downturn, is still relying on what Paul Krugman aptly derides as the “confidence fairy.” Note that two concepts that economists overwhelmingly consider critical disappear from Draghi’s fable: inadequate demand and fiscal stimulus. Irwin does not make any of these points.

“Structural reforms” is a dishonest euphemism for a war on workers’ wages and more of the same deregulatory race to the bottom that helped create the criminogenic environment and turn the City of London into the global financial cesspool. The war on workers’ wages further reduces demand, but is designed to spark a eurozone-wide race to the bottom. The obvious goal is to increase corporate profits and CEO wealth, but the war on workers’ wages is rationalized as essential to winning the race to become the largest net exporters. Yes, neo-mercantilism, the bane of Adam Smith’s existence, is back. It is being spread by those who purport to be his devotees. We cannot, of course, all be net exporters.

It is literally textbook that the first, best option is to respond to a recession with a combination of fiscal and monetary stimulus. In a severe recession fiscal stimulus is much more effective than monetary stimulus. The troika has refused to allow meaningful fiscal stimulus and insisted instead on self-destructive austerity. The troika attempts to fiscal policy disappear as a policy through the constant invocation of the claim that “there is no alternative” (TINA) to austerity.

It’s Bad When Davos’ Plutocrats and Economists More Pro-Stimulus than the NYT

The annual Davos debauchery is in full swing. The NYT tracked down Kenneth Rogoff, the high priest of debt hawks in Davos. It turns out that even Rogoff agrees the troika’s infliction of austerity has been self-destructive and needs to stop. More precisely, says contradictory things out of both sides of his mouth.

“[M]uch bigger steps need to be taken to fiscally stimulate the hardest hit European countries, Mr. Rogoff added. Primarily, he said, steps should be taken to significantly lighten the government debt of these countries, with a view to giving space and freedom for governments to spend more.”

If Rogoff means that debt forgiveness needs to be large enough to “significantly lighten the government debt of these countries,” that’s fine, but it won’t happen. He does admit that “much bigger steps need to be taken to fiscally stimulate the hardest hit European countries.” When the NYT’s coverage of the eurozone is far to the right of Rogoff you know that the paper is lost.


8 responses to “QE is Europe’s “Last Best Hope,” – If One Ignores the First, Best Hope

  1. As usual, Prof. Black, you speak for me.

  2. It does seem odd the central bankers are desperate to stimulate spending, yet their every action is to deprive the masses of money. Hey everybody, let’s do a helicopter drop (QE), but only to the people who won’t spend the money.. yeah that’s the ticket.

  3. –But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.–

    The whole theory of Economics has been explained only in three sentences. Well said.

  4. Why do you say that “the war on workers’ wages further reduces demand”?

    • As workers wages are driven down, they have less money to spend on purchasing goods. This reduces demand as people (workers) are buying less since they have less money.

      • Yeah but workers do not only have income they also have savings, which go longer if price level is reduced and shorter if it is increased. So the effect is probably other way around.

        • Maybe but with the sustain attack on wages, I would wager overall that savings has been reduced because it has been used to make up the shortfall in wages caused by the attack on wages for an extended period of time. Then there are those those really do not have much savings – a significant number of people living paycheck to paycheck and borrowing and living off credit cards. Admittedly this is worse in some countries than others.

  5. If workers’ wages are driven down they have less money to spend, but employers (who save on lower wages) and consumers (who save on lower prices) have more money spend. In this simple analysis the total amount of money to spend remains the same. But to this we can add production and consumption by those people who are currently driven out of the labor force because of high inflexible wages.