The OECD understands the Sumner Critique – Europe’s problem is monetary

This is from OECD’s Economic Outlook report published earlier today:

In the euro area, the area-wide fiscal consolidation (measured as an improvement in the underlying primary budget balance) of just over 4% of GDP between 2009 and 2013 was similar to that in the United States over the same period. This casts doubts about the role of fiscal tightening in explaining the comparatively weak performance of the euro area.

The OECD is of course completely right. The fiscal tightening in the US and the in euro zone have been more or less of the same magnitude over the last four years. So don’t blame ‘austerity’ for the euro zone’s lackluster performance.

The real difference between the euro zone and the US is of course monetary. The central bank can always offset the impact of fiscal tightening on aggregate demand. The fed has shown that, while the ECB has failed to do so. Rather the ECB continues to keep monetary conditions insanely tight. Aggregate demand is weak in the euro zone because the ECB wants it to be weak.

The ECB has failed. It is as simple as that and the OECD understands that.

HT Jens Pedersen

Leave a comment


  1. Images of monetary policy offsetting fiscal retrenchment:

  2. Benjamin Cole

     /  June 1, 2013

    The good news is that Asian central banks are all talking stimulus. The so-so news is the the Fed is talking, but it really running a neutral monetary policy.

    The bad news is the ECB. They are applying leeches to a patient with anemia.

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