Just What Is Europe’s Economic Destiny?: (Late) Friday Focus for August 15, 2014

Paul Krugman: The Forever Slump: “It’s hard to believe, but almost six years have passed….

…Recovery is far from complete, and the wrong policies could still turn economic weakness into a more or less permanent depression. In fact, that’s what seems to be happening in Europe…. The great policy argument… has been a debate between the too-muchers and the not-enoughers. The too-muchers have warned incessantly that the things governments and central banks are doing to limit the depth of the slump are setting the stage for something even worse… a Greek-style crisis any day now–within two years, declared Alan Simpson and Erskine Bowles some three and a half years ago. Asset purchases by the Federal Reserve would “risk currency debasement and inflation,” declared a who’s who of Republican economists, investors, and pundits…. The not-enoughers… have argued all along that the clear and present danger is Japanification rather than Hellenization…. To say the obvious, none of the predictions and warnings of the too-muchers have come to pass….

On the whole, the too-muchers have had much more influence in Europe than in the United States, while the not-enoughers have had no influence at all. European officials eagerly embraced now-discredited doctrines that allegedly justified fiscal austerity even in depressed economies…. The E.C.B… failed to match the Fed’s asset purchases… raised interest rates back in 2011 to head off the imaginary risk of inflation…. And now growth has stalled…

Indeed it has: no growth in eurozone industrial production in the past year:

“June 2014 compared with May 2014: Industrial production down by 0.3% in euro area…. In June 2014 compared with June 2013, industrial production remained stable in the euro area…”

Eurozone industrial production is at 101 on a 2005=100 basis. The U.S., by contrast, is at 110 on a 2005=100 basis.

I do confess I have a very difficult time understanding the attitude of the US Federal Reserve. It needs to gain some sea room before the next adverse macroeconomic shock hits, and so doing whatever is needed in order to get it to a state quickly in which raising interest rates is appropriate seems a no-brainer. Yet that is not what the Federal Reserve is doing. But my puzzlement at the policies of the Federal Reserve are absolutely dwarfed by my puzzlement at the policies of the ECB.

My extremely-shap next-door office neighbor Barry Eichengreen writes:

Barry Eichengreen: The ECB Tries Again “Rather than bemoaning the failure of President Draghi & Co. to move earlier…

…it is more productive at this stage to ask: are the central bank’s measures now up to the task… in the sense of taking deflation off the table and giving a boost to economic growth?… If policy is going to make a difference, policy will have to be unconventional…. The ECB is contemplating… purchasing securitized corporate and household loans. But in Europe, unlike the U.S., securitization markets are small…. If ECB officials conclude that the impact of TLTRO and securities purchase will be marginal, they should not give up hope; rather, they should strive to do more. There are other creative idea…. Jeffrey Frankel of Harvard suggests that the ECB should buy foreign bonds with the goal of pushing down the exchange rate, and through that channel fostering expectations of inflation rather than deflation. For some ECB governing council members, this may be a bridge too far. If so, it is incumbent upon them to explain what they will do instead and why, to paraphrase President Draghi, ‘believe me, it will be enough’.

The reference is to Draghi’s 2012 promise to do whatever was needed to preserve the euro.

Perhaps the explanation is that even though the Eurozone does not have a recovery, Germany does, and Germany rules the Eurozone? That is getting harder and harder to believe as time passes and as even the German economy flatlines:

In the middle 2011 it was possible to say that Germany had recovered from the crisis, that the remaining problems of southern Europe were the result of their own fecklessness, and that German growth was about to resume–it was wrong to say that, but it was possible. But we will soon have three years of no industrial production growth in Germany. I used to say back in 2010-2011 was that Europe’s real problem was the chaos in the south was good for the German economy: that every time a police car was torched on the streets of Athens, the euro dropped in value at another container of machine tools left Hamburg. But that has not been true for three years.

Keynes said, famously:

The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas…

But who are the economists–alive or defunct?–To whom the mad men in authority in Europe today are deferring? Convey, or someone representing them, please come out and publicly debate us?