Friday, 27 June 2014

Lagarde's apology may prove costly for the Euro area



The IMF’s Article IV consultation with the Euro area makes grim reading. It starts off upbeat:
"The euro area recovery is taking hold. Real activity has expanded for four consecutive quarters. An incipient revival in domestic demand is adding to the impetus from net exports. Financial market sentiment has improved dramatically, particularly after the recent ECB measures. Sovereign and corporate yields are now at historic lows in many countries, and lower funding costs have helped banks raise more capital."
And it then goes on to praise the efforts national governments have made to clean up their balance sheets. It also commends policy-makers and regulators for the nascent banking union and the clean-up currently in progress. “Strong policy actions have boosted investor confidence and laid the foundations for recovery”, it cheerfully proclaims.
But that’s where the cheerfulness ends. The fact is that the Euro area is still in deep, deep trouble....

Read on here.

3 comments:

  1. While I agree with your analysis, I am not so sure that the IMF losing credibility is such a disaster, because it keeping credibility would not necessarily help.

    My view of the EU and ECB is that they are so deeply invested in a self image of a highly successful economy that they simply aren't open to reason. To say that they will take heart from the UK's recovery is a bit of a misdirection. I would say that decision-makers in the EU simply don't recognize the UK's recovery and are persisting in imagining their own.

    Comments I see from the EU insist that the UK isn't "really" recovering at all, and that the whole thing is just a mirage caused by "house prices" and "running the printing presses full time". The recoveries in the sub-components of the UK economy, manufacturing, services and construction are simply ignored.

    And at the same time, the EU imagines its own success by confusing fiscal with economic issues. Ireland can be the 'poster child" for the success of austerity because it can return to the markets, while youth unemployment and emigration are minor issues that will solve themselves.

    I think the psychology behind these stances isn't so mysterious. A generation grew up in Europe that regarded the UK as an economic basket case, and Europe's relative success was very comforting. Even worse, for decades the EU borrowed a standard of living and investment they were not earning, and they seem to be convinced that they just have to wait for some pendulum to swing them back to strong growth.

    I think it will be another year at least before European leaders are willing to confront their real problems, and in the meantime they will put out more flags, appoint more officials and hold more press conferences.

    ReplyDelete
    Replies
    1. I completely agree. Very good analysis. Thanks Jon.

      Delete
  2. MMTers have taken a dim view of the IMF and OECD for some time. E.g. see:

    http://bilbo.economicoutlook.net/blog/?p=24922

    ReplyDelete