In Which I Go Around, Over and Over Again, in Circles as I Try to Understand What Is Going on in Europe: Monday Focus for August 25, 2014

Over in Yurp:

Paul de Grauewe: “[European policymakers] are doing everything they can…

…to stop recovery taking off, so they should not be surprised if there is in fact no take-off. It is balanced-budget fundamentalism, and it has become religious. We know from the 1930s that if everybody is trying to pay off debt and the government then deleverages at the same time, the result is a downward spiral. The rigidities in the European economy have been there for ages. They have absolutely nothing to do with the problem we face today…

Mario Draghi said differently at Jackson Hole last weekend. But how much of that is Draghi tuning his message for we West Siders (of the North Atlantic, that is) while the real policies are made for the benefit of the East Siders? The highly-intelligent and hardworking Jérémie Cohen-Setton provides a precis:

Jérémie Cohen-Setton: Is this a European U-turn?: “Mario Draghi is recognizing that the recovery in the euro area…

…remains uniformly weak and that the euro area fiscal stance was not helping the ECB do its job…. French leaders also reintroduced over the weekend the notion of aggregate demand, a concept they had noticeably moved away from with the ‘Pacte de responsabilite’…. Inflation, he noted, has been on a downward path from around 2.5% in the summer of 2012 to 0.4% most recently…. The big news is that Draghi does not (at least now) believe in balanced-budget fundamentalism…. Richard Portes and Philippe Weil write European citizens must hope that their policy makers will recognize that the acute, pressing problem is aggregate demand. Repairing the credit system, implementing serious reforms of state expenditure and taxation, creating more flexible labor markets, finally opening the services market to cross-border competition–all are indeed very important. But they will not liberate the eurozone from stagnation…

Wolfgang Münchau: Draghi is running out of legal ways to fix the euro “The ECB is failing to deliver on its inflation target…

not because it has run out of instruments but because it has based its policy on a poorly performing economic model… [and so] has committed three errors…. The ECB should have embarked on large asset purchases and cut interest rates to zero early on…. Mr Draghi’s promise to buy eurozone government debt… made everybody, including the ECB itself, complacent… [and] ended all crisis resolution. The third mistake was to misjudge the dynamics of the fall in inflation rates late last year…. The ECB should start by ditching the inflation target and replacing it with a price-level target… starting buying equities and junk bonds… subsidise mortgages and consumer credit… fund an investment programme in transport infrastructure, energy networks and scientific research…. All these measures would be effective. Most would be illegal. The one thing the central bank can do without any legal problems would be to drop the silly macroeconomic model–known as the Smets-Wouters model, after its authors–on which it has been relying for too long. My guess is that the ECB will not do any of these…

Eurointelligence: The price we are paying for serial policy errors: “Just as the ECB re-iterated for the millionth time…

…that inflation expectations remain firmly anchored, German 10-year yields defiantly dropped below 1% for the first time ever… the clearest sign yet that the markets are betting against the ECB’s inflation target. The message from the largest and most liquid fixed-interest rate market in Europe is telling us that Inflation expectations have firmly de-anchored…. For us the question is no longer whether inflation expectations have come unstuck. They have. The question is: can they be re-anchored?… Frankfurter Allgemeine and other German newspapers hardly mention any of this–they cover the overshooting French deficit obsessively. The paper’s Paris correspondent has an outraged editorial, which fails to mention that the French economy outperformed the German economy in Q2 (and for the period since the beginning of the eurozone as well)…

And Jeremie Cohen-Setton provides a roundup of the current state-of-play:

Jeremie Cohen-Setton: Europe’s Forever Recession: “As the recovery takes hold in the US…

…Europe appears stuck in a never-ending slump….The Economist writes that this week’s figures for the euro-zone economy were dispiriting by any measure…. Matt O’Brien writes that it’s been six-and-a-half years, and eurozone GDP is still 1.9 percent lower than it was before the Great Recession began…. Eurointelligence writes that until earlier this year, the eurozone’s macroeconomic development was a core vs. periphery story…. Ambrose Evans-Pritchard writes that it takes spectacular policy errors to bring about such an outcome…. Eurointelligence writes that this is a recession caused by policy failure…. Jeffrey Frankel writes that the peculiar way individual European economies define a recession makes it harder for the public to see that the same wrong policies have been followed…. Antonio Fatas writes the central bank should… communicate its view on how close the economy is to potential output…. Wolfgang Munchau writes that… the eurozone will end up looking like Japan…. Ambrose Evans-Pritchard writes that there is no point negotiating. The European institutions have failed to ensure a symmetric adjustment…. Matt O’Brien writes that the euro is the gold standard with moral authority. And that last part is a problem…

And Simon Wren-Lewis:

Simon Wren-Lewis: Balanced-budget fundamentalism They still teach Keynesian economics in Europe…

…so it is not as if the science is not taught. Nor do I find much difference between the views of junior and middle-ranking macroeconomists working for the ECB or Commission compared to, for example, those working for the IMF…. The mistake academics can often make is to believe that what they regard as received wisdom among themselves will be reflected in the policy debate, when these issues have a strong ideological element or where significant sectional financial interests…. There is a policy advice community that lies between the expert and the politician, and while some in this community are genuinely interested in evidence, others are more attuned to a particular ideology, or the interests of money, or what ‘plays well’… Some in this community might even be economists, but economists who–if they ever had macroeconomic expertise–seem happy to leave it behind. So why does ‘balanced-budget fundamentalism’ appear to be more dominant in Europe than the US?… The dominance of ordoliberalism in Germany… is not so very different to the dominance of neoliberalism within the policy-advice community in the US…. The greater ability of academics in the US (and one in particular) to bypass the policy advice community through both conventional and more modern forms of media. However I suspect a big factor is just recent experience. The US never had a debt funding crisis. The ‘bond vigilantes’ never turned up. In the Eurozone they did…. That is not meant to excuse the motives of those that foster a belief in balanced budget fundamentalism, but simply to note that it makes it more difficult for science and evidence to get a look in…

I am not completely sure what Simon Wren-Lewis means when he says that “the ‘bond vigilantes’… turned up in the Eurozone”. They certainly turned up in Greece and elsewhere along the Mediterranean rim. But this always seemed to me to be analogous to a possible (but unseen) debt crisis in Nevada. The sensible reaction–or, rather, not the sensible reaction but a not-insane reaction–would have been to say that the Mediterranean needs to get its structural house in order and that in the meantime Germany will make Eurozone policy and do what is good for Germany. And yet what is going on now in Europe does not seem to be terribly good even for Germany:

It is not any more that the Eurozone is having a normal (or even a sub-normal) recovery in its north and a public and private debt crisis-driven lost decade in the south. And the financiers of Tokyo, New York, London, and Frankfurt certainly now see a 1.3%-point/year break-even on the nominal exchange-rate change and thus break-even on the inflation differential between the U.S. and the Eurozone for the foreseeable future. This is remarkable for two economies that claim to be targeting the same inflation rate–and it is difficult to read the erosion of the U.S. ten-year bond rate over the past year as anything but a loss of confidence that the Federal Reserve will attain inflation as high as its 2%/year inflation target.

And when I think that my worries back in 2010 were that Germany might be unwilling to accept the 4%/year domestic inflation rate required for symmetric adjustment. It’s now 1.3%/year–at most…