This issue of the Newsletter comes with a...
This issue of the Newsletter comes with a series of timely suggestion for your northern-hemisphere-summer-readings and, hence, includes a bunch of items related to recently published books and journal-issues. In case these readings seem too conventional for you and you are currently searching for something more thrilling I could offer you this piece. It implicitly explains how Europe’s current perils are not so much the result of underlying economic problems, but rather the consequence of specific political decisions and strategies. The latter seem to cluster around the general idea that the threat of a sustained debt-bondage of whole countries might provide a suitable mean for enforcing the Eurozone’s stability and growth pact. How lucky for Germany that this informal addition to the Eurozone’s rules have not been fully implemented in the early 2000s when Germany regularly failed to keep its deficit and debt in line with Eurozone requirements.
In this context it is highly interesting to ask for the role of mainstream economics in all this. On a superficial level we observe economists’ interventions in all possible variations on diverse media channels. From a more nuanced perspective we might also focus on the role of economic models created on mainstream economic foundation used by the European Commission to academically substantiate their economic policy decisions (click here for an overview). The two most important models are the output-gap model (which is used to calculate potential outputs and NAIRUs for all member states to account for cyclical variations in output) and the quest-model (a standard open economy DSGE-model). These models often produce rather curious results: According to the output-gap model the “natural” unemployment rate in Spain is higher than 20%. In terms of the typical interpretation of such models this result stems from a too high level of labor market protection and real wages. However, more probably the result is simply driven by the fact that the NAIRU in this model is effectively calculated as a trend on unemployment, which shows strong procyclical tendencies. A recent implementation of the quest-model on the other hand “showed” that the current-account surplus in Germany is mainly due to the farsightedness of the German population, which allegedly is very good in anticipating demographic change and, hence, increased private savings which reduced nation-wide imports (leading to a corresponding increase in net exports).
Given these theoretical underpinnings to guide policy the extreme stance often taken by the European Commission as well as the European Council becomes somewhat less surprising. In sum it seems that the conceptual groundwork delivered by standard economic thinking is much more at the heart of the current European dilemma as it might seem at first sight.
All the Best,
Jakob