OECD offices, Paris. Photo: OECD/Michael Dean
The OECD keep up the offensive against austerity
With the publication yesterday of the November 2014 Economic Outlook, Catherine Mann,chief economist, kept up the OECD offensive against austerity in the euroarea. While political considerations plainly demand a gentle approach and mild policy recommendations, some telling and important theoretical / practical points were made which are worth recording (along with relevant slides). I confess I have left various structural and monetary points aside.
1. The failure in the EU is not because of of competitiveness/supply; it’s because of demand
GDP components (below) show exports strong; the euro area remains competitive in global markets. In fact the EU has been on an increasing share of global markets.
2. the weakness in demand is because of fiscal consolidation
“Constrained demand management policies” were behind the overall sluggishness of growth in the EU. Attention was drawn to the contrast between the “tremendous amount of fiscal consolidation in periphery countries” and less of it in the core.
3. Consolidation hits unemployment two to one.
Two percentage points are added to unemployment for every one percentage point of consolidation (NB the relationship does not depend on Greece).
(NB while helpful, my reservation on this approach is that the change in the primary balance is also an outcome of policy, depending on secondary/indirect (tax, benefit spend and GDP) effects of policy as well as any primary/direct effects.)
4. Policy: use all available flexibility
In terms of explicit policies, the main emphasis was on expansionary action in the core, with the periphery benefiting indirectly.
Note too that Catherine Mann threw cold water on Commissioner Junker’s announcement of a 315 bn euro package to support investment, stressing that it is “mostly not actual money on the table but there is 21 billion on the table which is designed to catalyse private investment”.
5. Public investment
We were reminded about the state of public investment, especially Greece and others where expenditures had been ‘savaged’.
This is a valuable diagnosis of cause. Perhaps inevitably, to my mind, the policy recommendations fall way short of what is needed.