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Sunday, 11 January 2015

Joseph Stiglitz wrote

"At long last, the United States is showing signs of recovery from the crisis that erupted at the end of President George W. Bush’s administration, when the near-implosion of its financial system sent shock waves around the world. But it is not a strong recovery; at best, the gap between where the economy would have been and where it is today is not widening. If it is closing, it is doing so very slowly; the damage wrought by the crisis appears to be long term. Then again, it could be worse. Across the Atlantic, there are few signs of even a modest US-style recovery: The gap between where Europe is and where it would have been in the absence of the crisis continues to grow. In most European Union countries, per capita GDP is less than it was before the crisis. A lost half-decade is quickly turning into a whole one. Behind the cold statistics, lives are being ruined, dreams are being dashed, and families are falling apart (or not being formed) as stagnation – depression in some places – runs on year after year." It is less that the damage is long term than that the efforts at recovery are the wrong ones. Europe's combined national governments could not agree on a communitaire coordinated responses that would mitigate the extreme imbalances, and so the job became perforce delegated to the ECB. The ECB had to replace Eur1.5tn roughly three quarters of bank deposits including inter-bank loans that afrom 2010 fled 'north' out of Portugal, Italy, Ireland, Greece, Spain. Two third of this has returned or been replaced. But, the renewed anxiety about Greece is causing a another phase of capital flight. Germany and other net exporters and UK (the first economy to benefit from US recovery) are not throwing money at the Mediterranean economies in crisis; the net flow is the other way about. The EU differes from USA insofar as extreme trade and payments imbalances are explicit within the EU and Euro Area without sufficient compensating rebalancing transfers as in the USA. Stiglitz sounds non-plussed by the EU's ineffective or negative action given that it at least has - "The EU has highly talented, highly educated people. Its member countries have strong legal frameworks and well-functioning societies. Before the crisis, most even had well-functioning economies. In some places, productivity per hour – or the rate of its growth – was among the highest in the world. But Europe is not a victim. Yes, America mismanaged its economy; but, no, the US did not somehow manage to impose the brunt of the global fallout on Europe. The EU’s malaise is self-inflicted, owing to an unprecedented succession of bad economic decisions, beginning with the creation of the euro. Though intended to unite Europe, in the end the euro has divided it; and, in the absence of the political will to create the institutions that would enable a single currency to work, the damage is not being undone. The current mess stems partly from adherence to a long-discredited belief in well-functioning markets without imperfections of information and competition. Hubris has also played a role. How else to explain the fact that, year after year, European officials’ forecasts of their policies’ consequences have been consistently wrong? These forecasts have been wrong not because EU countries failed to implement the prescribed policies, but because the models upon which those policies relied were so badly flawed. In Greece, for example, measures intended to lower the debt burden have in fact left the country more burdened than it was in 2010: the debt-to-GDP ratio has increased, owing to the bruising impact of fiscal austerity on output. At least the International Monetary Fund has owned up to these intellectual and policy failures." There tends to be an asymmetry within cycles, in that US downturns are transmitted faster to the euro area (and the rest of the world) than upturns: it takes around two quarters for downturns to be transmitted from the United States to the euro area, while it takes around six quarters for upturns. Second, taking into account estimates of potential output and output gaps (using those provided by the European Commission), the euro area as a whole tends to exhibit milder downturns, but also slower rebounds compared with the United States. A third important stylised fact is that recessions associated with financial crises, as well as those associated with credit crunches and house price busts, have typically been particularly severe and protracted. japan is a ood example where government recovery measures focused on refinancing the banks rather than refinancing the underlying economy. Arguably much the same has been occurring in the EU post-2008. Similarly, refinancing government and or the banks combined with austerity measures in government programmes and no effective pressure on banks to maintain and grow but not shrink bank lending to the rest of the economy is not a recipe for boosting general GDP growth. Stiglitz goes on to say: "Europe’s leaders remain convinced that structural reform must be their top priority. But the problems they point to were apparent in the years before the crisis, and they were not stopping growth then. What Europe needs more than structural reform within member countries is reform of the structure of the eurozone itself, and a reversal of austerity policies, which have failed time and again to reignite economic growth. Those who thought that the euro could not survive have been repeatedly proven wrong. But the critics have been right about one thing: unless the structure of the eurozone is reformed, and austerity reversed, Europe will not recover. The drama in Europe is far from over. One of the EU’s strengths is the vitality of its democracies. But the euro took away from citizens – especially in the crisis countries – any say over their economic destiny. Repeatedly, voters have thrown out incumbents, dissatisfied with the direction of the economy – only to have the new government continue on the same course dictated from Brussels, Frankfurt, and Berlin. But for how long can this continue? And how will voters react? Throughout Europe, we have seen the alarming growth of extreme nationalist parties, running counter to the Enlightenment values that have made Europe so successful. In some places, large separatist movements are rising. Now Greece is posing yet another test for Europe. The decline in Greek GDP since 2010 is far worse than that which confronted America during the Great Depression of the 1930s. Youth unemployment is over 50%. Prime Minister Antonis Samaras’s government has failed, and now, owing to the parliament’s inability to choose a new Greek president, an early general election will be held on January 25. The left opposition Syriza party, which is committed to renegotiating the terms of Greece’s EU bailout, is ahead in opinion polls. If Syriza wins but does not take power, a principal reason will be fear of how the EU will respond. Fear is not the noblest of emotions, and it will not give rise to the kind of national consensus that Greece needs in order to move forward. The issue is not Greece. It is Europe. If Europe does not change its ways – if it does not reform the eurozone and repeal austerity – a popular backlash will become inevitable. Greece may stay the course this time. But this economic madness cannot continue forever. Democracy will not permit it. But how much more pain will Europe have to endure before reason is restored?" Austerity policies are intuitively chosen by politicians who do not grasp how piublic and private sectors interact and who assume they can act significantly independantly of each other. There is limited understanding of how the public sector has sole responsibility for dragging national GDPs out of recession and how in EU especially this has to be an EU-wide effort. yet, the smaller the European economy the more it is assumed to be less dependant on EU-wide policy when the opposite is true.