Monday, April 22, 2013

What the "assessment of a realist" really tells us!

I would like to communicate my thoughts- fruits of my inexperienced existence and humble opinion- as far as "Eurozone cross-fire: the way out of economic recession - Assessment of a realist and a response to idealists and cynics" by Jörg Asmussen.

First of all, no one would be that naive as to accuse the board of the ECB of being the reason of today's debt-crisis. ECB is doing its best while complying with its mandate and as a matter of fact it can indeed perform much better but it is not allowed to do so. The fact that our central bank should have played a different, more active, role is a matter of political choice made by the European leaders and hence only the latter can be blamed for the current function of the ECB. So, critics targeting ECB, most probably do not target the governing body of the ECB but these who defined on what they should focus.

Below, you may browse the nominal World GDP and beneath that a stacked line chart of the exports of Greece, Portugal and Ireland in current prices.


It becomes obvious that we cannot conclude whether exports have an upward slope as a result of the decline in the unit labor cost or because world absorption rises with world GDP. I believe the former is much more grounded than the latter. I have already pointed out the decline in the competitiveness of Greece as this is measured by the World Economic Forum and the same has actually occurred for both Portugal and Ireland from 2010-11 to 2012-13. Nevertheless, I would honestly love to see evidence of enhanced competitiveness in addition to the lower unit labor cost.

Finally, let us suppose, for the shake of argument, that the way the debt crisis in Euro area is addressed is the correct one and we may sooner or later harvest the fruits of our efforts. It is probable, however, that growth is hamstrung (definitely is, to my point of view) by the austerity vortex and the question here is which tools will be used in order to deal with the following turmoil. Hopefully, we will eventually renounce the low-public-debt-at-any-cost dogma and turn to the Keynesian policy imperatives. 

Public debt resulting from structural weaknesses requires time to stabilize and to begin declining. If we are demanding time in order to make our single currency entity more efficient, integrate and competitive we have no right to deny the time the European periphery needs in order to adjust.

The "assessment of a realist" centrifuged: a myth, a pointless orientation and a self-confutation. That is why I am both cynical and idealist and I am proud of it. Do I seem like neglecting the long-term effects of the short run?