The Troika Continues to Harm the Eurozone

June 10th, 2014
in Op Ed

The WSJ Continues to Miss the Story

by William K. Black, New Economic Perspectives

The European Central Bank's (ECB) written policy is to maintain the eurozone inflation rate at just under two percent. The ECB has consistently failed to achieve that goal. Indeed, its failure has been growing steadily. The ECB's failure tells us something enormously important about what is wrong with the eurozone's economy and the troika's bleeding of that economy through austerity. 

Follow up:

The ECB's increasing inability to even come close to its inflation target demonstrates that demand remains woefully inadequate in the Eurozone - making austerity an insanely self-destructive policy. The Wall Street Journal (WSJ) reported on the ECB's latest failure in an article entitled "German Inflation Rate Plummets as Manufacturing Slows."

So, how long does it take for the WSJ to hi-light these two analytical insights for the reader? The WSJ "buries the lead" about the eurozone's horrific unemployment rate in the last clause of the last sentence of the last paragraph of its story. The fact that the people of Italy, Spain, and Greece are suffering a Second Great Depression disappears from the WSJ's narrative. The words "demand," "austerity," "fiscal policy," and "stimulus" never appear in the story. The WSJ is pioneering a new art. It has evolved from burying the lead to exorcising it.

Here is the WSJ's closest approach to analysis.

"Germany's annual inflation rate almost halved in May, heightening concern that the euro zone is facing a prolonged stretch of excessively low consumer-price growth that could derail its fragile recovery.

The sharp drop in the inflation rate came as business surveys released on Monday showed that manufacturing activity in the euro zone slowed more sharply than first estimated in May."

What causes inflation to fall sharply even when it starts from a very low level well below the ECB's target? A WSJ reader should want to know, but one would have hoped that the troika would want to know. The logical implication is that the journalist believes that low inflation causes recessions, which is false. Very low inflation of the kind the eurozone exhibits is a symptom of inadequate demand. The vastly more important symptom of inadequate demand is high levels of unemployment As inflation becomes very low or deflation occurs some consumers may defer major discretionary purchases, further reducing already inadequate demand and exacerbating the recession. The "inflation" theory of recession causation is wrong, but at its core it is a theory based on inadequate demand.

Why has "manufacturing activity" fallen sharply in the eurozone? Manufacturers sell fewer goods when the demand for their products falls. This fact is beyond the analytical powers of the troika and the WSJ. Instead, the WSJ emphasizes that the eurozone is in "a fragile recovery" that could be "derail[ed]" by low inflation (rather than lack of demand).

So let's try logic at this juncture in the WSJ's tale - the eurozone "recovery" is pathetic. Even under the WSJ's effort to spin a rosy tale the news continues to be terrible.

"Only Spain and the Netherlands recorded an acceleration of growth during the month.

The surveys indicated that manufacturers are hiring workers to meet rising new orders, although at a rate so modest that it seems likely to take many months before there is a significant fall in the currency area's unemployment rate from near record levels."

The last clause of the WSJ story finally gets to the lead - the eurozone's "unemployment rate [is] near record levels." In a rational world that would be the lead and social tragedy that would dominate the troika's concerns and policies. The WSJ and the troika don't even pretend to have any great sympathy for the unemployed.

We can now review the bidding of what passes for WSJ analysis. The eurozone bubbles popped in 2006 - eight years ago. The eurozone economy should have recovered completely from the crisis years ago. Instead, the troika inflicted austerity and forced the eurozone into a gratuitous second Great Recession. Italy, Spain, and Greece were forced by austerity into a Second Great Depression. Unemployment remains at Great Depression levels in Italy, Spain, and Greece and "near record levels" in the eurozone as a whole.

The eurozone's "recovery" is so "modest" "that it seems likely to take many months before there is a significant fall in the currency area's unemployment rate from near record levels." This may seem like a "modest" description of the "recovery" by the WSJ, but it is actually a dramatic overstatement of the degree of "recovery." The EU recovery rate is so pathetic that unemployment continues to increase in Italy. In Spain, one of only two Eurozone nations that had their growth rate increase in the latest month, the troika's chief troll, Olli Rehn, predicted that it would take until 2024 for Spain to escape the "crisis" phase of the Second Great Depression. The growth rate in other eurozone nations is so "modest" that if it were to continue unchanged for a decade, unemployment would either increase or remain at levels that would cause normal people to call the results a "recession."

The growth rate is so pathetic because demand is so inadequate. If the troika were to adopt stimulus they could produce a far higher growth rate - and if that stimulus program modestly increased inflation it would under the troika's own logic be highly desirable. Austerity is insane under that logic.

But the WSJ and the troika actually make a stronger case for stimulus now for they correctly describe the "modest" recovery as "fragile." Their response, however, is to wait for over a year wringing their hands about their failure to hit their inflation target rather than to promptly use the fiscal stimulus policies that even the IMF - a member of the troika - admits have proven so successful in this crisis when used by other nations.

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