On February 6, 2014, Mario Draghi, the head of the ECB said a series of contradictory things each of which indicated a failure to understand economics -- and the BBC article about his policies failed to point out or analyze this failure. Draghi's primary message, in response to news that "Eurozone inflation slowed to 0.7% in January from 0.8% in December" was:
"We have to dispense with this idea of deflation. The question is -- is there deflation? The answer is no.
We have to treat the recovery with extreme caution. It is very fragile. It is starting from very low levels but it is proceeding."- Advertisement -
As I explained in my January 25, 2014 column, the troika consists of the ECB, the EU Commission, and the IMF. The troika's definition of the "recovery" it hopes for in Spain is grim. The troika made Spain its poster child for the success of austerity in late 2013. In early 2014 Spain admitted that unemployment had risen to 26 percent and the troika's most over-the-top propagandist for austerity, Ollie Rehn, was the only one willing to comment on that news.
"Thursday's figures were met with official silence in Madrid. But in an interview with El Pas, the European commissioner for economic and monetary affairs, Ollie Rehn, said that in Spain the EU had tried to combine the goal of solvent public finances with economic reforms.
"There were no easy alternatives for Spain nor for anyone. Those that think there was a simple way to recover access to the markets without painful measures are wrong,' he told the paper. "It will take 10 years to fix the Spanish crisis.'"
Spain Rains on Rehn's Austerity Victory Parade: Unemployment Rises to 26%
Let's review the bidding to this point on the troika's claims about the "recovery."
- The "very low [economic] level" that Spain, Italy, and Greece are "starting from" is a Great Depression -- unemployment in these countries exceeds Great Depression levels
- "Is there deflation?" The answer is yes, some of the worst hit EU nations are already suffering from deflation. Several more are within a few tenths of a percentage point of deflation.
- The "recovery" they hope for is that Spain, by 2024, will exit the "crisis" stage
- They do not state how many years after that Spain might achieve full employment
- That is their optimistic scenario, which assumes there will be no serious shocks for the next decade -- which is exceptionally improbable
- Spain's bubble collapsed in 2006, so even if the grossly improbable optimistic scenario proved realistic the recovery simply from the "crisis" stage would take 18 years
- The "recovery" is "fragile" and requires "extreme caution" from the troika to protect and aid it
Deflation is the symptom: Use fiscal policy to treat the problem of inadequate demand
I have explained at length why the troika's framing of the "deflation" issue indicates an abject failure to understand economics -- and the media's failure to even raise this point indicates how bad economic coverage is.
An economy like Spain is suffering from grotesquely inadequate demand. Monetary policy can make things worse, but it cannot produce a rapid recovery in such circumstances. Fiscal policy can. Deflation is simply a symptom that demand has become critically inadequate and the economy may soon fall back into recession. It is insane to wait until one is near deflation to act, but the reason isn't that something suddenly happens when average prices fall. One should act as early as possible by using fiscal policy, as soon as it seems likely that a recession is about to begin, to counter the recession. The concept of waiting -- in a Great Depression in Spain, Italy, and Greece -- for things to get so bad that deflation sets in is economically illiterate. The further concept that when deflation sets in monetary policy (particularly quantitative easing (QE)) is the most effective means of stopping deflation demonstrates the triumph of theoclassical ideology over reality and experience.
We know that the troika pretends not to understand economics. The IMF periodically publishes studies showing the strong effectiveness of fiscal stimulus and warning about inadequate demand. What we are seeing from the troika is the triumph of ideology and German politics over economics and the resultant devastation of much of Europe's periphery. What is harder to understand, particularly from the NYT, is why these more fundamental forms of economic insanity are virtually never discussed? The best thing Spain could do to fight its Great Depression would be to pay $20,000 for the travel costs to hold a seminar for the NYT's business and financial reporters at which Dean Baker, Jamie Galbraith, Stephanie Kelton, Paul Krugman, Bill Mitchell, Warren Mosler, and Randy Wray would explain money, finance, demand, unemployment, inflation, growth, recession, fiscal and monetary policy, debt, and deficits. One problem, of course, is that Spain's leader is a rabid austerian.