Left Outside

Worse than fiddling while Rome burns

A central bank is never doing nothing. Every announcement tells you not just about policy now, but about likely policy in the future. By announcing that rate cuts were not even discussed at January’s meeting the European Central Bank is offering forward guidance that would make Nero seem empathetic.

The Eurozone is blowing up. Unemployment is increasing across Europe and this is in large part because of contractionary policy from the ECB.

Eurozone unemployment rate

However, and I still can’t quite believe it, inflation remains stubbornly close to the ECB’s target of 2%, even in pain-racked Spain (see HICP in the below table for FT Alphaville).

The ECB has done all sorts of unconventional things. For example, it has publicly demanded certain styles of reforms in certain countries (insert: free market and Southern Europe), radically overstepping its supposed mandate. Likewise, it has threatened intervention in the bond market of certain countries to push down yields where they have cooperated, so-called Outright Monetary Transactions, for countries that play along with the ECB’s plans.

What they have not done, in a continent savaged by depression is cut fucking interest rates in the last six months. They have another 0.75% before they reach 0, but they are not willing to do so.

Am I losing my mind, or is the main conventional tool central banks have to fight off depression and suffering interest rates? In the UK and the US, to a certain degree central banks have become “mute.” Their interest rates reach the floor and they can go no further, but this isn’t the case in the Eurozone, they’ve never run out of ammunition, they’ve never been stuck at zero unable to go lower.

Let that sink in.

Maybe they couldn’t have lessened the suffering much (although really they could), but they could have lessened it a little but they have decided not to. Suffering in the Eurozone is a policy choice. I think it is because some people think suffering is good for the soul and Southern Europe has sinned.

If you’ll permit me to flit between classical Rome and Greece, Nero while of fiddled while Rome burned but at least he stuck to the old Greek dictum “first, do no harm.” I wish the ECB would do the same.

Filed under: Economics

When NGDP is Depressed, Employment is Depressed

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