Dean Baker: Sick Europe and the Italian Elections:
The elections in Italy prompted another round of knowing comments about how Europeans must get over their silly attachment to employment security (e.g. “Europe Stalls on the Road to Economic Change”). None of the comments I saw even considered the possibility that the contractionary policies of the European Central Bank (ECB) play any role in Europe’s economic weakness.
The basic story here is fairly simple. While Alan Greenspan lowered the overnight interest rate in the United States to 1.0 percent in the summer of 2003, the ECB never lowered its overnight rate below 2.0 percent. This is in spite of the fact that inflation in the euro zone has been the same or lower than in the United States and the euro zone has consistently had higher rates of unemployment. The story does get more complicated (the Fed’s overnight rate is now 4.75 percent, compared to 2.5 percent in the euro zone), but I would argue that the ECB has consistently been more contractionary than the Fed in its policies. Everyone recognizes that the Fed can stimulate the economy with low interest rates and slow growth with high interest rates, why don’t we think that the European economy works the same way?
The countries on which the Europe critics focus their wrath (France, Italy, and Germany) have small current account deficits or surpluses, meaning they don’t face the painful adjustments that loom for the Spain, the United States, and New Zealand. This means that when the adjustments actually occur, we may have a different assessment of which countries’ economies look good and which ones look bad. Until then, we will have to listen to many more tirades from the Europe critics, whose voices go virtually unanswered in the media.