QE is Europe’s “Last Best Hope,” – If One Ignores the First, Best Hope
By William K. Black
Bloomington, MN: January 23, 2015
Its the curse of the commentator on commentators. I recently wrote nice things about Neil Irwins New York Times column about the Eurozone. On January 22, 2015, he wrote a column about the ECBs adoption of quantitative easing (QE), that claimed it was last, best hope for the Eurozone. In fairness to Irwin, his column contains plenty of skepticism as to whether QE is even a poor hope for the Eurozone. Irwin also has the right quotation from Mario Draghi, the head of the ECB.
Mr. Draghi acknowledged that it would take more than an open spigot of money from the central bank to get Europes economy on track, and that political authorities across Europe must act as well. What monetary policy can do is to create the basis for growth, he said at a news conference in Frankfurt. But for growth to pick up, you need investment. For investment, you need confidence. And for confidence, you need structural reforms.
Yes, Draghi, seven years after the onset of the EU downturn, is still relying on what Paul Krugman aptly derides as the confidence fairy. Note that two concepts that economists overwhelmingly consider critical disappear from Draghis fable: inadequate demand and fiscal stimulus. Irwin does not make any of these points.
snip* It is literally textbook that the first, best option is to respond to a recession with a combination of fiscal and monetary stimulus. In a severe recession fiscal stimulus is much more effective than monetary stimulus. The troika has refused to allow meaningful fiscal stimulus and insisted instead on self-destructive austerity. The troika attempts to fiscal policy disappear as a policy through the constant invocation of the claim that there is no alternative (TINA) to austerity.
http://neweconomicperspectives.org/2015/01/qe-europes-last-best-hope-one-ignores-first-best-hope.html#more-9036