THE STASH MARCH 20, 2009
...albeit not entirely convincingly.
Lorenzo Bini Smaghi of the European Central Bank recently responded to Paul Krugman's critique of Europe's response to the economic crisis. The case mostly comes down to two things: automatic stabilizers (like unemployment insurance, which tends to be more generous in Europe) and Lehman Brothers. The Journal's Real Time Economics blog has the translation:
[S]tarting with the question of fiscal policy, an area in which – according to Krugman – Europe has failed, more so than the United States, to enact an effective recovery policy. This conflicts with recent IMF calculations, which show that the fiscal stimulus in European countries is wholly comparable to that seen in the United States, particularly when taking into account measures to cushion the effect of automatic stabilisers, which, by contrast with the United States, are a major factor in Europe. For instance, for the period 2009-10, discretionary measures adopted in Germany total 3.5% of GDP, compared with 3.8% in the United States. In some European countries, such as Italy, the size of such stimulus measures is relatively limited owing to the high levels of debt, but in other countries the total fiscal stimulus is larger than in the United States. ...
As regards monetary policy, the degree of stimulus can be better measured by comparing market interest rates, rather than official interest rates. Such a comparison shows that European rates are more or less in line with those observed in the United States, and are even lower in some cases. For example, 6 and 12-month interbank interest rates in Europe are slightly lower than their US equivalents. Furthermore, real interest rates – i.e. net of inflation – are markedly lower in Europe than in the United States, and retail interest rates on mortgage lending and lending to non-financial corporations are of a comparable magnitude, if not somewhat lower in Europe. ...
Krugman’s argument is that it is better to have only one decision-maker in a crisis, rather than 16 governments which need to coordinate their actions, as is the case in the euro area. In theory, this seems reasonable. But it doesn’t explain how the most fateful decision of all – the decision to allow a systemically important bank to fail in the midst of a financial crisis – was taken by a single decision-maker, while the 16 euro area governments have managed to avoid making such a large mistake. Neither does it explain how euro area governments have managed to agree on measures aimed at bank recapitalization, at guarantees to bank liabilities and on principles for removing toxic assets from banks’ balance sheets, decisions which have become a point of reference for all the countries of the G20.
I'll let Krugman respond for himself, but I'd just note a couple things: 1.) There seems to be a lot of wiggle room in the term "comparable." 2.) It's not super helpful if Germany's coming close to what we're doing but Italy isn't in the same zip code--you need concerted action to avoid diluting your efforts. 3.) Not only have we been more aggressive using monetary policy, there's a lot more in the pipeline that we've committed to (even before the Bernanke's trillion dollar announcement this week), while Europe has dragged its feet a bit. So market interest rates at this precise moment aren't necessarily the best gauge of monetary policy effectiveness. 4.) Lehman seems a bit unfair. It was obviously a mistake, but I'm not sure what it has to do with the response to the crisis that followed.