Must-Read: Simon Wren-Lewis: Spain, and How the Eurozone Has to Get Real About Countercyclical Policy
Must-Read: Has Simon Wren-Lewis just become a Lernerian–a devotee of and an evangelist for MMT? It looks to me as though that is the case! Mirabile visu:
: Spain, and How the Eurozone Has to Get Real About Countercyclical Policy: “The current recovery… is export led, which is exactly what you would expect…
…The Eurozone does have a natural correction mechanism when a country becomes hopelessly uncompetitive as a result of a temporary domestic boom (whatever its cause). The mechanism is a recession and what economists call ‘internal devaluation’: falling wages and prices. The problem with this correction mechanism is that, on its own, it is slow and painful, particularly when Eurozone inflation is so low. So the key question is what could Spain have done to avoid having such a painful period of correction…. As Matthew Klein points out, Spain already had some sensible macroprudential monetary policies, and it seems likely that more of the same would not have been enough. Which brings us of course to fiscal policy…. Many commentators… say, correctly, that Spain’s problem was never a profligate government…. [But for] an individual country in a currency union the deficit is not the appropriate metric to judge short term fiscal policy…. The appropriate metric is national inflation relative to the Eurozone average…. So forget the actual budget deficit or any cyclically corrected version, fiscal policy was just not tight enough.
I have been told so many times that for Spain to have a tighter fiscal policy before the crisis was ‘politically impossible’. If that really is true, then Spain has little to complain about when it comes to the subsequent recession…. It seems more than likely that the existing monetary but not fiscal/political union is here to stay for some time. Many in Europe’s political elite plan to move quickly to greater union (see Andrew Watt here), but there are serious obstacles in their path. The current system can be made to work better, and strong countercyclical fiscal policy is an obvious part of that…. Just how many years and recessions does it take before what is obvious textbook macroeconomics can become politically acceptable?