Friday, 24 May 2013

Let us not forget the Euro zone

The European Central Bank [ECB] are still not concentrating on GDP, but the highly flawed CPI including oil and VAT that they are trying to hold well below 2% will inevitably produce the sort of slow GDP growth that will inevitably produce recession. The ECB is not at the zero bound.  Over the past few years they’ve been repeatedly steering Euro zone inflation through conventional policies of raising and lowering the short term interest rate.

Euro zone tight money is keeping Euro zone GDP flat, and that’s a sufficient condition for a recession. Yes, they may also have supply-side problems, but that’s beside the point. Tight money is a sufficient condition for recession. They can adopt a policy of 4% GDP growth if they want to; they simply don’t want to. Until that dynamic changes, the Euro zone will continue to under-perform.

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