In the past year, there have been many proclamations that the euro crisis is over, and that Europe’s economy is on the mend. Behind these proclamations lies something very real – a huge convergence in interest rates, thanks to the European Central Bank’s support, and a growing belief that the political risks to the euro have receded – and something more dubious: a modest uptick in debtor-country growth.
So the latest gross domestic product numbers in the euro zone are really disappointing. It’s not just that overall growth remains slow – although after an extended slump economies are supposed to have a period of above-average growth as they return to trend, and 0.9 percent at an annual rate doesn’t cut it. It’s also that the growth is in the wrong places. We need to see convergence between the austerity-ravaged countries on the euro zone’s periphery and the countries in the core; in fact, Germany is the main source of growth, with periphery nations falling further behind.
Oh, and has anyone noticed that the “Baltic miracles” are looking a bit less miraculous now? Growth in Estonia is actually down this year, and Latvia is growing no faster than the United States.
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The European story remains one of deeply destructive economic policies, which have inflicted vast harm – but have not led to unraveling because the political cohesion of the euro zone is stronger than people like me realized.
The cohesion is a good thing, I guess, but the policies still aren’t working.
Predictions and Prejudice
The 2008 crisis and its aftermath have been a testing time for economists – and the tests have been moral as well as intellectual. After all, economists made very different predictions about the effects of the various policy responses to the crisis; inevitably, some of those predictions would prove deeply wrong. So how did those who were wrong react?
The results have not been encouraging.
For example, the economist Allan Meltzer is still issuing dire warnings, most recently in a Wall Street Journal op-ed about the inflation to come. Newcomers to this debate may not be fully aware of the history here, so let’s recap. Mr. Meltzer began banging the inflation drum five years ago, predicting that the Federal Reserve’s expansion of its balance sheet would cause runaway price increases; meanwhile, some of us pointed both to the theory of the liquidity trap and Japan’s experience, explaining that this was not going to happen.
Tests in economics don’t get more decisive; this is where you’re supposed to say, “O.K., I was wrong, and here’s why.”
Not a chance. And the thing is, Mr. Meltzer isn’t alone. Can you think of any prominent figure on that side of the debate who has been willing to modify his beliefs in the face of overwhelming evidence?
Now, you may say that it’s always like this – but it isn’t. Consider the somewhat similar debate in the 1970s over the “accelerationist” hypothesis on inflation – the claim by the economists Milton Friedman and Edmund Phelps that any sustained increase in inflation would cause the unemployment-inflation relationship to worsen, so that there was no long-run tradeoff. The emergence of stagflation appeared to vindicate that hypothesis – and the great majority of Keynesians accepted that conclusion, modifying their models accordingly.
So this time is different – and these people are different. And I think we need to try to understand why. Were they just pretending to do something like science, when their true interest was always politics? Is there simply too much money and too much vested interest behind their point of view?