Faced with deflationary forces in its core, and a lasting depression in the periphery, the Eurozone requires a major investment drive. One of the Modest Proposal’s policy recommendations is that the European Investment Bank (along with the European Investment Fund) embarks upon a massive investment drive (up to 8% of Gross Eurozone Product) without any national co-funding. These investments could be funded through 100% issues of EIB-EIF bonds, with the European Central Bank purchasing, in secondary markets, sufficient quantities of these bonds to ensure that their yields stay well below 1.5%, thus making a European New Deal not only possible but also self-financing – and off the books of national budgets.
The logic of this scheme was outlined first in a post entitled How should the ECB enact quantitative easing? A proposal. It received considerable support at The Economist May 2014 Bellwether Conference, as well as in the Journal of Central Banking, where Tom Bowker wrote an article entitled QE for infrastructure investment could be ECB’s alternative to ‘pushing on a string’.
Most recently, Wolfgang Münchau, in his regular Financial Times column, astutely noted that Prime Minister Renzi and Chancellor Merkel are on a collision course, courtesy of the former’s determination not to fall prey of Italy’s slow burning depression. Renzi, according to Münchau, is committed to an investment boom that will see off the forces of recession. Merkel, on the other hand, is determined not to allow fiscal deficits to exceed the Fiscal Pact’s austere limits. Can a clash be avoided?A European New Deal financed by the EIB, with ECB QE-backing, is the optimal policy: Now recommended also by W. Münchau
The answer is affirmative…
Yanis Varoufakis
(h/t Jan in the comments)
Load of nonsense. Just because AD is inadequate, that does not prove that extra AD in the form of more investment rather than more consumer spending is the best policy. I.e. the MMT policy of simply creating fiat the spreading the extra money fairly widely (over both public and private sectors) makes more sense.
ReplyDeletePlus I see from Varoufakis’s article that Wolfgang Munchau trots out the old canard about now being a good time to invest because interest rates are low. First problem there is that interest rates are low because central banks have ARTIFICIALLY lowered them. I.e. those low rates do not necessarily reflect underlying economic realities.
Second, a 2% or so change in base rates is a total irrelevance for the average firm. That’s because banks lend to firms at way above base rate. And second, interest is just one of the many costs involved in running an investment: i.e. there’s also depreciation, insurance and in the case of buildings property taxes (maybe).
This is the problem with abstract economic models. People then erroneously conclude that this is the way the world works and recommend policy accordingly, regardless of empirics.
ReplyDelete"First problem there is that interest rates are low because central banks have ARTIFICIALLY lowered them. I.e. those low rates do not necessarily reflect underlying economic realities."
ReplyDeleteThose interest rates look pretty real to me, Ralph. What do you mean by artificial?