Tags: Blinder | Europe | fiscal | stimulus

Blinder: Europe Needs More Monetary, Fiscal Stimulus

By    |   Thursday, 30 October 2014 01:07 PM

Conflict is brewing over economic policy in the eurozone, with Germany backing austere fiscal and monetary policy and most other members favoring the opposite.

Princeton University economist Alan Blinder, former vice chairman of the Federal Reserve, sides with the latter.

"European economic performance since 2008 makes the lackluster U.S. look marvelous by comparison," he writes in The Wall Street Journal.

"Unemployment in the eurozone today is higher than it was in 2009-10. Not only is real GDP still below its 2008 level, but it hasn't grown for more than three years and may be heading down again. Meanwhile, deflation is more of a worry than inflation."

Eurozone GDP rose only 0.1 percent in the second quarter over the first. And annual eurozone inflation totaled just 0.3 percent in September.

"The macroeconomic prescription is pretty clear," Blinder argues.

"On the monetary front, the ECB [European Central Bank] should move strongly and quickly into unconventional stimulus programs . . . . On the fiscal front, those eurozone governments that still have fiscal space . . . should lead the way with more public spending and/or tax cuts," he adds.

"Structural reforms are designed to enhance a nation's ability to supply goods and services, that is, to raise productivity. In the long run, nothing is more important to standards of living than that. But if the nation is in a slump, there is already lots of spare capacity. In Europe today, successful structural policies would just increase the volume of slack. The more pressing need is for greater demand."

The ECB bought 1.704 billion euros ($2.2 billion) of covered bonds last week. But analysts noted that's a trifle compared with the Fed's bond purchases of $85 billion a month last year.

"Most people would like them to do a lot more," Craig Veysey, head of fixed income at Sanlam Private Investments, told Bloomberg. "If the ECB can't find enough to buy, then the market will start speculating that they will have to buy corporate and government bonds as well."

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Conflict is brewing over economic policy in the eurozone, with Germany backing austere fiscal and monetary policy and most other members favoring the opposite.
Blinder, Europe, fiscal, stimulus
338
2014-07-30
Thursday, 30 October 2014 01:07 PM
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