Tag Archives: confidence fairy

The ECB confirms the confidence fairy doesn’t exist

In this working paper, the ECB studies the ‘confidence effects’ of fiscal consolidation, or what many call austerity politics. There are some ifs and buts but by and large this study confirms what Keynesians warned about: budget cuts in the middle of crisis have great negative effects.

It is of course one thing to have these statements in a working paper. It would be quite something else for the ECB to admit it has been repeatedly wrong (remember Trichet?) and furthermore, fiscal policy considerations are not quite supposed to be the terrain of the ECB anyway. But they now can share their wisdom with ECOFIN and the Commission.

Dijsselbloem believes in the confidence fairy: “If we now are less tough on fiscal consolidation, we will kill the recovery”


In this Dutch interview (excerpt online only)with the Dutch Finance minister it is clear that Dutch and European economic policy is unlikely to change (he is the head of the Eurogroup). He really states what is said in the title. Yep, confidence fairy time again.

He also says:

Het probleem is dat werkloosheid hoog is, dus er gaat veel geld naar uitkeringen. De uitgaven voor de gezondheidszorg blijven stijgen, die voor de ouderenzorg ook. Zolang die structurele trends niet gekeerd zijn, zit er weinig anders op dan blijven besparen.’

Or in English: ‘the problem is that unemployment is high, so a lot of money goes to unemployment benefits. Costs for healthcare and elderly care are also rising. As long as those structural trends are not bent the other way, there is no other solution to cut budgets.’

Cost for healthcare and elderly care may be part structural,  given the retirement of the babyboomers. I don’t know about the healthcare  issue, but this may have a lot to do with how the Dutch system works.

But that Dijsselbloem suggests that Dutch unemployment is structural, is rather strange. Yes, the Netherlands had a housing bubble but it is not only construction workers and real estate brokers that are unemployes. A recent report I saw (by the Dutch statistics bureau I think) made explicit mention of loss of jobs in business services, including IT and consultancy.  This has to do with demand. Not structural issues.

The suggestion that cutting government budgets must help to buck trends is quite something. Probably social benefits might be meant, e.g. cutting unemployment benefits might speed up the transfer of workers to other sectors, if Dijsselbloem really thinks Dutch unemployment is structural.

The Dutch economy is going for a rough ride. Why do Europe’s strong countries have such misguided leader? Oh and he also think Olli Rehn will be lenient when (not if, in my mind) the Dutch government will not meet the budget criteria in time.

With politicians like Dijsselbloem,  Europe is doomed, and European Social Democratic policy as well.

Historian suurmiehiä

http://rahajatalous.wordpress.com/2013/02/23/historian-suurmiehia En tiedä onko Rehn jo suurmies, mutta on ainakin niin, että sillä on valta, päättäväisyys ja ihan väärä taloustieteen malli. Pitää katsoa, mihin tämä johtaa!