It´s not “austerity” that explains the relative positions of the EZ and US

Commenting on Stiglitz, DeLong writes “Joe Stiglitz vs. the Austerity Zombies”:

That U.S. policy since 2008 has been so much more successful than Eurozone policy even though the center of the financial crash was in the U.S., in the desert between Los Angeles and Albuquerque, should have caused the Eurozone to revise its economic policies and move them closer to the more-stimulative policies of the U.S. And it should have caused the U.S. to revise its policies and moved them further away from the hyper-austere policies of the Eurozone. But no.

DeLong shows a version of this chart:

Austerity Zombie_1

Which shows that real output performance of the EZ is much worse than in the US. This is put on the tab of the “hyper-austere policies of the Eurozone”.

In the chart I identify the moment in 2011 that Trichet´s ECB thought it right to raise rates! That´s the moment the output behavior begins to diverge.

The charts below indicate that from their peaks, the US has done more fiscal consolidation than the EZ, measured either by the reduction in the structural deficit or by the decrease in government spending.

Austerity Zombie_2

Austerity Zombie_3

And the next chart indicates that it is more “austere” monetary policy in the EZ, not “fiscal austerity” that explains the difference in output growth. In the US spending growth has fallen to the rate observed previously in the EZ, while in the EZ it has turned flat.

Austerity Zombie_4

Note: Three years ago, many people thought that by now there was a significant probability that the Euro would have broken-up. Logic would indicate that the first country to abandon ship would have been the one most free to do so. That´s Denmark, and it hasn´t! My question to Lars: why not?

The charts show NGDP and trend of Denmark (linked to the Euro) and Sweden (totally free). It appears “freedom” is not a sufficient condition for a country to get monetary policy right!

Austerity Zombie_5

Austerity Zombie_6

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