For the past two years Desmond Lachman has been saying that the US is, or is about to enter a recession. His calls fell flat and that´s good because otherwise we would be doing a repeat of 1937!
In “Behind the curve at the ECB” he ‘crosses the Atlantic’ and I think he may get ‘lucky’:
Today, true to form, the ECB decided to leave its monetary policy on hold despite the many reasons one might have expected that it might have taken a more proactive policy stance. This is unfortunate since it heightens the probability that the European economy will sink deeper into recession during the course of 2013, which is all too likely to reignite the European sovereign debt crisis.
Yet a further reason one might have expected the ECB to have taken a more accommodative monetary policy stance is the sharp recent appreciation of the euro, which must be expected to both curb export growth and exert downward pressure on inflation. Over the past few months, the euro has appreciated by around 20% against the Japanese yen and by about 10% against the US dollar. And there is every prospect that this appreciation could continue as the US Federal Reserve, the Bank of Japan, and the Bank of England all engage in aggressive quantitative monetary policy easing.
And he gets close to the heart of the matter in his last paragraph:
The only plausible reason for the ECB’s undue caution is that it might be fearful of opening up a second front in its battle with the Bundesbank ahead of the German elections in September 2013. This might be understandable given how antagonistic the Bundesbank has been to the ECB’s Outright Monetary Transactions program and how hard a line the Bundesbank takes on inflation. If this is indeed the case, it has to be regretted. The last thing that Europe now needs is a central bank that will be inhibited by political considerations from taking the necessary action to limit the risk of an ever-deeper European economic recession.
From looking at the charts below, I would say that was an easy bet!
Isn’t looking at NGDP for countries in the Euro zone separately sort of like looking at the differences between Louisiana, Nebraska, and New York? If we looked at California around 2008-09 I bet we’d see a big problem compared to others. But I am not sure how useful it is since tight money is tight money – it’s just tighter in some places than others and I think Germany had a problem with tight money during reunification which could distort its trend.
Bonnie, it´s just a useful illustration of the EZ problem. You would likely not find such great differences in the US. The US has a Central Federal Government and mobility and transfers are ‘smooth’ when compared to the EZ. And notice that Germany is doing ‘well’ (at least in a relative sense). If MP is right for Germany it´s very wrong for the others. And Germany ‘calls the cards’. I start the trend in 1995 since by then Germany had mostly adjusted to unification.
Thanks for clearing that up for me.
Marcus – Am I correct to say that the implication, though, is that easing MP for the EZ would imply German NGDP being well above trend then? How can the Germans deal with that – raise taxes, perhaps?