Which posted the strongest growth at the beginning of 2016: the US,
UK or the Eurozone? The answer is the Eurozone. Growth at 0.6% for
the quarter (about 2.5% at an annual rate) is nothing to write home
about, but it is not the stuff of doom and gloom either. Reasonable
growth like that should come as no surprise. The economy is receiving
as much monetary stimulus as the ECB can currently muster, and fiscal
contraction has come to a halt.
Inflation is still well below target, but the reason for that is
straightforward enough (as Martin Sandbu points
out): there is still a lot of spare capacity. Inflation will only
stabilise at around the 2% target when that spare capacity has
disappeared. Policy should be doing everything (more public
investment!) to ensure that happens through strong growth rather
than, as seems to have happened in the UK, a gradual contraction in
supply. On inflation the ECB should make their target 2%, rather than
the current
‘below but close to’ 2%, to avoid the Japan problem that Narayana
Kocherlakota discusses here.
I went further when I wrote
two weeks ago (the GDP figures came out a week ago) that “I also
think we may see rapid Eurozone growth before [2020]”. By rapid
growth I mean something in excess of 2.5%. I said that because I was
adding one other factor into the mix of fiscal neutrality and
monetary expansion, which is that the Euro has been pretty
competitive for well over a year. As Martin points out, that has so
far not contributed anything to recent Eurozone growth.
I have read in a few places recently people saying that the impact of
international competitiveness is not what it was. I agree with Paul
Krugman
that this pessimism is unlikely to be warranted. I have spent a
significant part of my working life estimating and applying trade
elasticities (the impact of international competitiveness on trade
and hence demand), and this experience has taught me that this effect
is a bit like Milton Friedman’s description of how monetary policy
works: there can be long and variable lags. So I expect that the
Eurozone’s competitiveness gain over the last year and a half will
begin to impact on Eurozone GDP at some point in the next year or
two, and that might just provide more rapid growth than we saw at the
beginning of 2016.
