It’s Domestic Demand, Stupid!

There are many ways to communicate fairly difficult issues. The case against austerity is one; again and again the ‘families tighten their belt thus also the state must do so’-argument comes up. This argument has been defeated as many times. Here you can see a ‘layman’s argument against austerity’. But in my opinion this new post by ‘A Gloomy European Economist’ puts the argument much clearer. To quote from the main points of his graph:

What is this figure telling us? Many things, actually; but I’d like to point out just three:

  1. The first is that while the US have recovered and are now above their pre-crisis GDP level, the EMU is still more than 3% below its level of January 2008. We are not going to see the pre-crisis level of activity for at least 2 or 3 years, as the Commission just revised downwards its (negative) growth forecast for 2013 (not surprising, and bound to be further revised, as the readers of this blog may know).
  2. Domestic demand is down almost 6%, mostly because of investment (-19.1%).It makes no sense claiming otherwise: this is a Keynesian (sorry for the bad word; should I rate this post R?) aggregate demand deficiency crisis. On the contrary, in the US, robust consumption growth has compensated for the equally dramatic drop of investment, and as a result domestic demand is also above its pre-crisis level. As a sidenote, the dramatic decrease of investment makes one wonder what will be left of the EMU capacity to produce, once aggregate demand resumes.(my bold)
  3. The only two engines of growth, today are public consumption (!) and exports, both at around +4% with respect to the pre-crisis peak ; they compensate, unfortunately only partially, the dramatic drop in domestic private demand. Further reducing government spending, as will most probably keep happening, will lay the burden of recovery only on the external component. It is worth repeating that this small-country-syndrome, in the second largest economic bloc of the world, can only spell disaster. It is impossible to conceive a long-term reliance of our prosperity on demand coming from the rest of the world, as proponents of the “Berlin view” would like us to believe.

If you look at the picture, then indeed public consumption and exports keep the Euro area somewhat afloat. But with the intense desire to slash government spending, this might not last. I think this picture shows very succinctly why we need a Keynesian and/or MMT view of the economy very badly – if everybody cuts expenditure at the same time, how is the economy supposed to grow, or – more specifically – where is demand coming from? Mars?

While this post is very important in showing the core problem, I personally would like to see a bit more country-specific information. It is well-known that Germany has a great domestic demand-deficit, but what about Finland, the Netherlands, Austria? A recent post by Ambrose Pritchard-Evans, and earlier ones by me (referring to yet other posts) indicate that domestic demand is being killed in the Netherlands at least through austerity, private indebtedness and a stuck and plunging housing market, but as I showed here, Finnish domestic demand (at least retail) has kept up fairly well. I haven’t recently checked the numbers, but food price inflation in Finland seems to be rather high, so domestic demand may have reached its peak already.

(in general it would be nice to have a better idea of how to get key data out of Eurostat – there is so much stuff there!)

Mr. Gloomy Economist also points to the need for wage increases; at least for Germany, this is acknowledged by serious economists (i.e. from the IMK of the Hans-Böckler-Stiftung). This is a subject which I have great interest in, as it relates strongly to industrial relations and the relevance of labour unions. As I pointed out here (sorry, in Finnish), Olli Rehn warns Finland of overindebtedness (of the state, of course) and states Finland needs wage restraint. Well, as the graph shows, the index of real wage earnings has grown approximately by 2% per year, which is consistent with the inflation of the ECB target (if I understand Andrew Watt correctly).

So, in this light I eagerly await what the employers’ and employees’ federations in Finland are serving as opening bids in the run-up to the Finnish collective agreement/centralized incomes agreement -negotiations this Autumn. I expect lots of disagreement, at least.

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One response to “It’s Domestic Demand, Stupid!

  1. Pingback: Finnish Finance Ministry once more adjusts forecasts for 2014 | Arjen polku

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