Both in the EZ and US there´s evidence for the monetary view of the crisis

David Beckworth had this up today:

Now lest you think the strong relationship is simply the result of nominal GDP being in the denominator of the the debt burden measure take a look at the following figure.  It shows actual  nominal GDP for the Eurozone and its trend for 1995:Q1-2006:Q4 which are used to construct the percent deviation of nominal income from its expected level in the figure above.  The trend provides an indicator of what nominal income growth expectations were prior to the 2008-2009 crisis.

Note that nominal income falls sharply between 2008:Q2 and 2009:Q3, but actually grows thereafter.  Thus, the ongoing rise in the debt-to-GDP ratio (see figure below) is not just because of the sharp fall in nominal income.  It is because monetary policy has not allowed nominal income to grow fast enough to restore it to expected levels where the debt burden is more manageable.  This in turn, has caused Eurozone debt burden to take off with no end in sight as seen in the figure below of the government debt-to-GDP ratio for the Eurozone:

So yes, the Eurozone crisis is a monetary crisis, a crisis catalyzed by the failure of the ECB to stabilize and restore nominal spending to its expected level.  Again, though, there are longer-term structural and political problems with the Eurozone that arguably are behind the monetary crisis.  Still, if the Eurozone experiment is to be salvaged, then a proper monetary diagnosis of the current crisis has to be realized so that the currency union can survive long enough for it to be salvagable.

But this is exactly what´s happening in the US:

Same monetary view of the crisis but very different implications. Why? Because of the dysfunctional political and structural nature of the EZ currency union compared to the US´s own.

Update: Europe is not the US:

But the key argument made by European officials and other defenders of the euro has been that, because a single currency works well in the United States, it should also work well in Europe. After all, both are large, continental, and diverse economies. But that argument overlooks three important differences between the US and Europe.

First, the US is effectively a single labor market, with workers moving from areas of high and rising unemployment to places where jobs are more plentiful. In Europe, national labor markets are effectively separated by barriers of language, culture, religion, union membership, and social-insurance systems.

A second important difference is that the US has a centralized fiscal system. Individuals and businesses pay the majority of their taxes to the federal government in Washington, rather than to their state (or local) authorities.

The third important difference is that all US states are required by their constitutions to balance their annual operating budgets. While “rainy day” funds that accumulate in boom years are used to deal with temporary revenue shortfalls, the states’ “general obligation” borrowing is limited to capital projects like roads and schools. Even a state like California, seen by many as a poster child for fiscal profligacy, now has an annual budget deficit of just 1% of its GDP and a general obligation debt of just 4% of GDP.

2 thoughts on “Both in the EZ and US there´s evidence for the monetary view of the crisis

  1. Pingback: Europe: Calling a spade a spade | The Corner

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