Monday, October 14, 2013

Bad Policy Choices Are Responsible For Low Growth In Eurozone

Wolfgang Munchau argues that countries tend to operate on their long term trend lines.  They are sometimes above or below the trend line but they move back to the trend line unless bad policy decisions are made.  Japan is a good example.  It made terrible policy decisions that kept it below its long term trend line for 18 years.  The same thing seems to be happening in the eurozone (EZ) today.  If the EZ had fixed its banking system in 2008 as the US did, and if it had not pushed fiscal contraction, it would have returned to its trend line.  Instead the policies that it adopted produced a 12% GDP gap between where it would have been today without those policies and where it is today. 

Some argue that the EZ trend line prior to 2008 was a bubble and that its current trend line is where it should be.  High unemployment and slow growth is the new normal in the EZ.  Munchau disagrees.  He argues that there were bubbles in countries like Latvia and Spain but not in the EZ as a whole.  The EZ growth rate of 2.3% between 1999 and 2007 was 2.3%.  That is identical to the growth rate in the previous decade.  Bad policy decisions are to blame for the weakness today in the EZ.

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