Europe is in trouble. “The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a ‘lowflationary’ trap that makes it hard to grow, and is even harder to escape from,” wrote Matt O’Brien, analyzing some of the most recent eurozone economic data earlier this month. The situation in Europe, he says, is worse than during the Great Depression. At Bruegel, Jérémie Cohen-Settonsays that “Europe appears stuck in a never-ending slump.”
This was the backdrop for Mario Draghi’s Jackson Hole speech on Friday on the state of unemployment in Europe. The ECB president urged a move away from austerity. “This could be done by a greater use of aggregate fiscal policy (having a common eurozone budget), and by looking at opportunities to substitute spending for tax cuts…” says Joe Weisenthal.
Draghi also noted that inflation expectations across the euro zone are very low. “Mr. Draghi appeared to be hinting at renewed concerns about deflation in the euro zone,” say Pedro da Costa and Jon Hilsenrath. They also think Draghi’s speech “appeared to be laying groundwork for a bond-buying program” (that is, quantitative easing).
In another post, Weisenthal says that the most important part of Draghi’s speech was an unscripted tangent on low inflation, which he says can’t just be explained by temporary issues anymore. “Draghi is done making excuses for low inflation,” says Weisenthal. He also quotes Lorcan Roche Kelly, who thinks that Draghi’s spontaneous comments shouldn’t be taken lightly: “you must remember that this is a tactic that Draghi has used before to spectacular effect — his ‘whatever it takes’ speech in London in July 2012 was unscripted.”
Of course, after Draghi’s (careful and measured) criticism of European fiscal policy in Wyoming, the French economy minister, Arnaud Montebourg, resigned Monday after “delivering a blistering attack on what he called ‘absurd’ austerity policies,” according to the Financial Times. Simon Wren-Lewis says that he was “effectively sacked” by the French President Francois Hollande. Whatever the political motivations, it is silly for either Hollande or Draghi to stand behind austerity even a little bit, Wren-Lewis says. Why, he asks, “has the European left in general, and the French left in particular, not learnt the lessons of the 1920s and 1930s?” — Shane Ferro
On to today’s links: