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Home Publications Blogs Beat the Press Actually, It Is Easy to Design Monetary Policy for the Euro Zone

Actually, It Is Easy to Design Monetary Policy for the Euro Zone

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Monday, 01 July 2013 07:22

A NYT story on the rise in the euro zone unemployment rate to 12.1 percent noted the sharp differences in unemployment rates across the euro zone and told readers:

"The divergence makes it difficult for the E.C.B. to craft a monetary policy that is appropriate for all members."

Actually this is not true. The euro zone needs expansion everywhere. It also needs re-balancing with the peripheral countries (e.g. Spain, Greece, and Portugal) becoming more competitive relative to the core countries (e.g. Germany and Austria).

If the ECB pursued more expansionary policy it would directly reduce the unemployment rate in the peripheral countries. It would also lead to somewhat higher inflation in the core countries, making the peripheral countries more competitive. This is exactly the results that we should want to see.

As a political matter this may be difficult because Germans have superstitions about inflation, but that is a political issue. There is no economic reason not to pursue more expansionary policy.

Comments (5)Add Comment
Dean Getting Some Love
written by James, July 01, 2013 12:16
You were interviewed and quoted in the CNNFN.com article. Good to see that.

Economist Dean Baker, of the Center for Economic and Policy Research, suspects what is really boosting the consumption numbers is not that the finances of average Americans have improved, but instead what we are seeing is a boost from the special dividends companies paid out at the end of last year, in order to avoid the tax hikes of the fiscal cliff. Those went mostly to wealthy Americans. The rising stock market has, too, mostly served to improve the finances of the more well-off. That may explain why big ticket items are rising faster than spending in general.
the political correct terminology is so fraudulent
written by pete, July 01, 2013 12:54
Say it clearly. The problem is real wages in the poorer EU places rose faster than productivity, as Krugman so clearly pointed out. At one point he suggested that they were 25% too high. Thus, as Dean and PK agree, an inflation is the least obvious way (meaning the workers will not notice it as much) of getting real wages down. And hopefully, they will fall faster in the peripherals than in the North, and so they will produce more stuff (though they will have less money due to falling real wages).

And lets talk structural unemployment. When BART workers can strike to get higher wages when there is 20% real unemployment, something does not add up. Striking for higher wages when there is such underemployment is simply greedy.

It's hard to report on entrepreneurship
written by JaaaaayCeeeee, July 01, 2013 5:31

Catherine Rampell's latest Economix post (and a lot of economics)has me confused. http://economix.blogs.nytimes....ore-165072

Is innovation any more trackable by numbers of patents filed than economic growth by Dow Jones?

Are immigrants really just more entrepreneurial than natives or are they a group consisting of such diverse subgroups as the discrimminated, the less burdened by student loans, and the better connnected to offshore labor and tax schemes?
What?
written by James, July 01, 2013 11:54
"And lets talk structural unemployment. When BART workers can strike to get higher wages when there is 20% real unemployment, something does not add up. Striking for higher wages when there is such underemployment is simply greedy."

Since the writer failed to say which location the BART workers he was referring to, just assume SF as it hit today. Is it 20% real unemployment in SF?

How are their current compensation compared to the F...cost of living in SF? Should they live in Richmond, Walnut Creek or how about F...San Jose?

With your 20% REAL unemployment rate, those greedy executives demand ever more perks, options, and pay.

To a genius, it's greedy when a worker asks for living wages, but not when execs rigged the system to their full tilt - that's called creativity and market-based pricing.
basically 1937 all over again....
written by pete, July 02, 2013 9:37
at that time, unions did the same thing, raising wage demands during a nascent recovery.....double dip...

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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