Hear that? Europe’s in recession and the mighty Wurlitzer cranking up for the biggest gig yet. France. Jean Quatremer noted this back on the 12th of November. Apparently, Wolfgang Schauble is briefing-out the idea of sending German experts to help the French implement economic reforms. Of course, Francois Hollande is not actually pursuing an 80s Mitterand strategy of fiscal and monetary reflation in one country, he’s planning to cut the deficit sharply, but it seems that it’s not about the deficit. Cutting it by taxing the rich isn’t really cutting it. The majority must suffer, I guess.
The IMF has capitulated and accepted that the fiscal multiplier is much higher than they thought, to the extent that the austerity trap is real. By austerity trap, I mean the situation where pro-cyclical fiscal policy has such a deflationary impact on the economy that the government budget deficit increases. The analogy to the liquidity trap, where lower interest rates no longer have any stimulative effect because people just want to sit on cash, is deliberate. The liquidity trap is characterised by interest rates near zero; the austerity trap, by a very high fiscal multiplier.
The chart comes from NIESR director Jonathan Portes’ blog post on his organisation’s effort to measure the impact of Eurozone fiscal contraction. He finds the trap – in the right circumstances, scenario 2 on the chart. Izabella Kaminska blogs estimates of the output gap in the UK that are dramatically higher than previously thought. Duncan Weldon, on the UK trade unions’ policy blog, points out the link between estimates of productivity and estimates of the size of the financial crisis. If you think the bubble was smaller, and consequently the crash, you must also think labour productivity has fallen. This will have consequences for your policy judgments. Of course, if you think the problem is productivity, you are probably also inclined politically to minimise the financial crisis.
The shortest comment is from the New Yorker. And, perhaps most crushingly of all, here’s a list of economies ranked by growth since 2010. The UK is 158th and all the countries in troika management are worse that that.
Wiesaussieht points out that the credit rating agencies’ views on France aren’t dominated by “competitiveness” but rather by the weakness of Southern European trading partners and the banks’ exposure to Southern European debt. This is far from a trivial point. You can see it working out in the day-to-day political news. Peugeot is in trouble because its cars sell best around the Mediterranean. Arcelor-Mittal’s Florange site is mostly a supplier to the car industry. Arnaud Montebourg and, more to the point, the old steel executives he’s taking advice from think it can be turned around because it’s well placed to supply the German car industry as well.
Here’s another chart of the week – the German trade surplus is now contributing more to the global imbalances than China’s.
Here’s Krugman. of course. Unfortunately, Art Goldhammer blogs, there is no sign of anything moving. Macrointelligenz offers some hints. Euromoney compares the markets for Italian and French government bonds, and points to another austerity trap: things break when nominal GDP growth falls below the yield on the public debt.
If Hollande allows himself to have a Schauble-esque virtual-troika plan imposed, I expect that this trap will be triggered.