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The eurozone economy continues to spiral downward:

PARIS “” Unemployment in the euro zone rose to yet another record high in the first two months of the year, official data showed Tuesday, providing confirmation that the economy remains in a deep freeze. The jobless rate reached 12 percent in both January and February, the highest since the creation of the euro in 1999 . . . European officials continue to hold out hope that the economy, which continued to shrink in the first quarter of 2013, will begin turning around in the second half of the year. Many private sector forecasters are more pessimistic, expecting a contraction of as much as 2 percent in the euro zone’s gross domestic product this year, after a 0.9 percent contraction last year. While there is general agreement that the current course for addressing the euro crisis “” heavily focused on budget- balancing measures that reduce overall demand “” is not working, the need for emergency action like the recent bailout of Cyprus has appeared to inhibit any deep rethinking of economic policy. In the absence of new measures to stimulate growth at the European and national levels, all attention will be focused Thursday on the governing council of the European Central Bank, which meets in Frankfurt to consider whether to maintain interest rates at their current record low or cut even further. Britain, the largest E.U. economy outside the euro zone, had an unemployment rate of 7.7 percent in December, the latest available month. In the United States, the jobless rate fell in February to 7.7 percent, the lowest since late 2008. The consensus among economists surveyed by Reuters is for U.S. nonfarm payrolls Friday to show a gain of 200,000 jobs in March, after a gain of 236,000 in February. The European labor market has now declined for 22 straight months, making this the worst downturn since the early 1990s, Jennifer McKeown, an economist in London with Capital Economics, wrote in a note. In particular, she said, the rise in France’s February jobless rate to 10.8 percent from 10.7 percent in January “looks very worrying.” “With fiscal tightening still putting downward pressure on disposable incomes and consumer confidence at very low levels, household spending is likely to fall further in the coming months,” Ms. McKeown said. On Tuesday, a report by Markit Economics showed the euro zone’s manufacturing sectorcontracted again in March, with an index of purchasing managers activity dropping to 46.8 from 47.9 in February. An index level below 50.0 suggests contraction, while a level above that suggests expansion. The manufacturing index has contracted every month since August 2011. Manufacturing activity in Germany and Ireland, which had been expanding, began to decline again. The euro zone manufacturing sector shed jobs in March for a 14th consecutive month, Markit reported, with “steep rates of declines reported in France, Italy, Spain, the Netherlands, Ireland and Greece,” and only Germany and Austria bucking the trend.

Let’s summarize:

1. Fiscal austerity has failed, i.e. the eurozone needs more AD. Everyone seems to agree on that.

2. The countries with high unemployment are mostly too broke to do more fiscal stimulus, and the Germans don’t want to pay for the mistakes of others. So fiscal stimulus is off the table.

3. The US and the UK, also had severe financial crises, but have unemployment rates of 7.7% and falling, while the eurozone has a rate of 12% and rising.

4. The Fed and the BoE were more aggressive than the ECB in trying to boost AD.

5. The ECB is considering a reduction in interest rates.

Does it take a PhD in economics to understand what the eurozone obviously needs to do?

And yet my European commenters tell me that economics is different in Europe. They don’t use the Anglo/American macro models. There is virtually no discussion of the need for monetary stimulus to boost NGDP on either the right or the left.

I’m certainly not saying that everyone in the world should think like we Anglo-Saxons. God knows we have plenty of problems, plenty of blind spots. I wouldn’t want the French to copy our passenger rail or nuclear power industries. But when a model of the world has clearly failed, don’t you need to start looking at alternatives? Is there any model that has failed so completely, so abysmally, as the macro model that led the euro-elite to create the euro and then instruct the ECB to totally ignore aggregate demand shortfalls? I suppose Soviet communism would be close.

PS. Things are so bad in the eurozone that even a reduction in interest rates won’t help all that much—they need far more aggressive action from the ECB.

PPS. Also check out Matt O’Brien’s excellent column on the euro-mess.

PPPS. TravisV asked me to comment on the recent Martin Feldstein piece. There’s nothing new—David Beckworth has already refuted the view that low interest rates are caused by Fed purchases of T-securities. (So has Paul Krugman.) The Fed still holds roughly the same small share of T-securities they held a decade ago. Both nominal and real rates on T-bonds have been falling steadily for 30 years, as tighter money has steadily reduced NGDP growth rates. I would simply add that Feldstein’s column shows the folly of trying to outguess the markets:

The very low interest rate on long-term United States Treasury bonds is a clear example of the current mispricing of financial assets.

When the market conflicts with your model of the economy, don’t question the market, rethink your model.

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This entry was posted on April 02nd, 2013 and is filed under Monetary Policy. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response or Trackback from your own site.



