Tuesday, 26 August 2014

Stuck in the mud and risking deflation

These charts accompanied an article in the FT of last Friday titled :
Spectre of Japan-style lost decade looms over eurozone.

The only thing wrong with this article is that Japan has lost decades ( plural ), not just one decade, by failing to address deflation appropriately and the Euro-zone is risking a similar fate.

This article was published the same day that Mario Draghi was speaking at the Central Bankers' gathering at Jackson Hole Wyoming in the US where he expressed concern about the risk of deflation and promised that the ECB will, within its mandate, adopt more aggressive non-conventional monetary measures.

These few charts say a long story:

  • production in the Eurozone is barely expansionary and is stuck well below its potential - first chart.
  • GDP in Eurozone is still below its 2007 peak - whereas in the US it is well past it, in UK and Japan they are practically there.  Obviously there is an even bigger gap between the level of production and the trend line i.e. where GDP would have been if we had no 2008 great recession - second chart
  • Eurozone inflation is dangerously dipping close to depression levels - third chart
  • Unemployment remains obstinately high in double digits - fourth chart
The message coming clearly from these charts is that the Eurozone is suffering from a problem caused by lack of demand and that there is ample spare capacity leaving great space for demand stimulating measures without risking inflation. 

With such a clear message the ECB has a duty to act.  The problem is that probably the ECB's mandate is not wide enough to permit it to take the necessary measures to really address the problem at its source.

If politicians cannot take fiscal policy measures and other direct restructuring initiatives to create the needed demand to start addressing unemployment and restore confidence, can't they at least do what it takes to extend the mandate of the ECB so that Mario Draghi can really do whatever it takes without the restrictions of the present narrow mandate?

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