Ambrose Evans-Pritchard on the Eurocrisis and bad policies

A quote from a long and insightful comment by Ambrose Evans-Pritchard

The report warned that “new divide” is emerging between the EMU core and those countries “that seem trapped in a downward spiral of falling output, fast rising unemployment and eroding disposable incomes The waive of austerity policies raise important questions about the viability of Europe’s welfare states,” it said. Indeed.

The Economist Poll of forecasters expects the eurozone to contract 0.2pc this year, with scant growth in 2014.

By then millions of people will have fallen into an “enormous poverty trap,” to borrow the words of EU jobs chief Laszlo Andor.

It is why Gustav Horn — head of Germany’s IMK Institute and one of the country’s five `Wise Men’ — called for an end to the contractionary torture last week. “It’s a vicious circle. Excess austerity is not reducing debt, it is causing debt to rise,” he said.

Dr Horn has concluded that the only viable way to close the gap is for Germany to tolerate an inflationary boom with 4pc wage growth for a while. He is right.

I haven’t been able to find Dr Horn’s comments but this is exactly the medicine also prescribed by e.g. Paul Krugman and Joseph Stiglitz, and other experts of the so-called Zero Lower Bound -economics.  The IMK instute is a very respectable institute and I hope Germans finally take note. Last weekend I spoke with a German who complained that all European countries have lived above their means, and that deficits should be cut. I tried to discuss this issue, because it rather makes a difference if you have your own currency or not (see this already classic article by Paul de Grauwe) but to no avail – many Germans (and Dutch, and Finns) seem to have adopted the myth of ‘Mediterranean overspending/borrowing’. I really hope the European policy elites come to their senses, because the human suffering in the face of a bad diagnosis of the problem is too catastrophic too contemplate.

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