I read something over at the Uneasy Money blog that sounds strange:
“…the potentially insolvent countries in Europe are facing insolvency not because of their budgetary and labor-market policies, but because of a sharp slowdown since 2008 in rate of growth in nominal GDP in the Eurozone as a whole (averaging just 0.6% a year since the third quarter of 2008). Why has nominal GDP not increased as rapidly since 2008 as it did before 2008? Some of us think that that it has something to do with policies followed by the European Central Bank,..”
Turning this around Greece and the other insolvent countries in Europe would be fine if there would be growth. Then we have two questions: why did they stop growing? and why aren’t they growing?
The author does not seem to think that there is any connection between budgetary and labor-market policies and growth. Instead, he tells us that monetary policy is responsible for both fall in GDP in 2008 and GDP not growing since 2008.
As you know I believe that money matters, mostly in the short run. In other words, I believe that surprise significant changes in the money supply do have and effect on the economy in the short run. But that’s it.I do believe that in the long run agents in the economy adjust to anticipated higher money supply like they adjust to anticipated weaker domestic currency.
Still money is a funny thing. I believe that if a central bank will withdraw all money from an economy tomorrow, by surprise, that economy will die. In the same time I believe that if the central bank will increase money supply a billion times tomorrow by surprise the economy will not grow as much. The effect of money in an economy becomes asymmetric after some point. And this is where I think we are today in the EU. More money from the ECB will not help it will actually start to be counter productive.
However, I do not agree that budgetary and labor-market policies in Greece and in the other troubled European economies are not responsible for the mess they are in today. If that were true than it would be just a coincidence that countries with bad budgetary and labor-market policies have had to default – internally or externally. In the same countries we find week justice systems, controlled prices, state-owned companies, big public sectors.
The negative recession shock has hit all countries in the world almost simultaneously, but the ones in trouble today are those with bad budgetary and labor-market policies. Why is it that the supposedly bad monetary policy is having a negative impact only in these countries? How will monetary easing by the ECB help those countries without killing the ones growing today?