Thursday, 11 October 2012

European blues

Europe  is currently in what the Yanks would say is a funk.

The problem is that monetary policy can't really get a lot lower and there is one exchange rate for all nations in the Euro area.

Therefore when European nations bring in contractionary fiscal policies then one can only expect the economies to contract and that is what has occurred. They have reduced their cyclical adjusted fiscal deficits quite significantly. See here .

As we saw yesterday the IMF has offered a mea culpa. They were wrong and the policies they advocated have made the situation worse.

To reduce debt you must have growth and classical economics in bad times makes economies worse not better and hence debt ratios worse not better.

We have known this since at least 2010

When will people learn?