A guest post by Mark Sadowski
Simon Wren-Lewis is at it again:
While the reasons for the Great Recession may still be controversial, the major factor behind the second Eurozone recession is not: contractionary fiscal policy, in the core as well as the periphery. So this is something we really do know.
It is only because of the continuous issuance of preposterous statements like this by people who should know better, that the causes of the Great Recession are even controversial. Not only is this something we do not know, it is something that we know is not true.
The second Euro Area recession was clearly monetary in origin. The ECB raised the MRO rate from 1.0% to 1.25% in April 2011 and then to 1.5% in July. The six quarter second recession started the following quarter. The Euro Area was never near the zero lower bound in interest rates and the ECB chose to raise the policy rate in the face of projections that core inflation would remain below target and the output gap would remain high for at least the next two years.
The US makes a useful comparison. The Fed kept the fed funds rate near zero throughout 2010-2013 and elected to do a second round of QE in late 2010 to mid-2011 and to start a third round in late 2012. The ECB has yet to initiate even a single round of QE.
According to the April 2014 IMF Fiscal Monitor the US increased its cyclically adjusted primary balance (CAPB) by 4.7% of potential GDP between 2010 and 2013 (bottom half Table 1.1 page 11):
The five core Euro Area nations that Simon Wren-Lewis considers (France, Netherlands, Belgium, Austria and Finland) increased their CAPB by a weighted average (according to 2010 nominal GDP) of 2.6% of potential GDP from 2010 to 2013. The GIIPS increased their CAPB by a weighted average of 5.0% of potential GDP from 2010 to 2013.
Between 2010 and 2013 nominal GDP (NGDP) increased by 12.3% in the US, by 6.2% in the core Euro Area nations and decreased by 1.8% in the GIIPS. Between 2010 and 2013 real GDP (RGDP) increased by 6.6% in the US, by 1.4% in the core Euro Area nations and decreased by 4.1% in the GIIPS.
It would have made absolutely no sense for any of the Euro Area nations to be doing fiscal stimulus when the ECB was nowhere near the zero lower bound and in fact raising the policy interest rates. Moreover the US economy has easily outperformed the economies of all of these countries in both nominal and real terms despite being at the zero lower bound in interest rates, and doing roughly the same amount of fiscal austerity as the GIIPS.
The one thing that the Great Recession, in tandem with the Great Depression, has made absolutely clear is that the liquidity trap is a myth promoted by those with a agenda no matter how much empirical evidence there is to the contrary.