Ray Barrell's picture
Affiliation: 
Brunel University London
Credentials: 
professor of economics

Voting history

German Council of Economic Experts' view of ECB policy

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Question 2: Do you agree that the ECB's monetary policy masks structural problems of member states?

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Answer:
Disagree
Confidence level:
Confident
Comment:
The ECB's policies have not masked structural problems, but these have been made more difficult to deal with by a fiscal policy stance that has been tighter than needed in most European countries. Nominal growth in Europe is likely to rise sharply in 2017 as the depressing effects of the fall in the oil price stop impacting on inflation. Few countries in Europe are running fiscal deficits that will cause debt stocks to rise as a percent of GDP. Structural problems still persist in Europe, and they reduce equilibrium output and raise sustainable employment. Labour and product market restrictions may also reduce the speed at which an economy can move when it is not at capacity. However, none of these factors stop growth being sustainable, and this is more likely to arise from a shortage of demand, and especially from tight fiscal policies. Public financed infrastructure investment in most European economies would help reduce structural problems, and reductions in unemployment amongst the young and the unskilled in countries such as Spain, France and Italy would leave space for structural reforms to labour protection and employment legislation. It is important to remember that Europe is not Germany, and the rest consists of much more than Greece. Policy needs to be set, and criticised, in relation to the whole of the Euro Area, not just its extremes.

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Question 1: Do you agree that exceptionally loose monetary policy by the European Central Bank is no longer appropriate?

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Answer:
Agree
Confidence level:
Very confident
Comment:
Exceptionally loose monetary policy. There is clearly a good case for the ECB to modify its monetary stance. Inflation is expected to rise toward target in 2017 as oil prices have strengthened and some European economies are close to full capacity. How much scaling down of asset purchase schemes is required depends on factors such as changes in the stance of fiscal policy in the Euro Area and elsewhere. Asset purchases were a wise response to excess capacity and negative inflation in the Euro Area, and perhaps should have been introduced earlier. The sharp decline in oil prices at the end of 2014 made the ECBs task much harder, as it brought inflation down to levels that required unusual measures to help expand demand after the Euro Area crisis affected the economies in 2012 to 2014. Historically low real interest rates globally left little room for traditional methods of monetary expansion when inflation was close to zero. Hence unusual measures were called for. They will no longer be needed unless fiscal policy is tightened across Europe.

German current account surpluses

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Question 2: Do you agree that the German government should increase public spending given its persistently large current account surplus and given that it is part of the Eurozone?

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Answer:
Strongly agree
Confidence level:
Very confident
Comment:
German fiscal policy should obviously be set in line with the objectives of the German polity. These objectives include having enough saving for old age and a desire to increase profits from exporting technology into plants abroad to serve foreign markets through Foreign Direct Investment. The former may require current account surpluses, but it is not clear the latter does. In addition maintaining the current set of compromises that keeps Europe at peace is also a clear objective of most German policy makers. The scale of German current account surpluses is putting that political compromise under pressure. The evidence suggests that a fiscal surplus in an economy at full employment will be largely reflected in a current account surplus, and a reduction in the fiscal surplus will reduce the surplus. A rise in German public investment, for instance, will reduce the surplus in two ways, firstly through demand and secondly through competitiveness. Although road building may have a limited import content, at the first round, the workers employed spend their incomes, and two fifths of that may be on imports. In addition the increased level of demand will raise real wages and prices. A lower current account surplus will be associated with a higher real exchange rate, and in EMU this can only be achieved by having German inflation higher than that in its partners for a period (but not permanently). A current account surplus reduction of one percent of GDP may require a two percent higher real exchange rate. This would mean German inflation would be one per cent higher than otherwise for two years, and the German government budget surplus would have to be one to two percent lower. A political compromise on this would make sense for the German people as well as for the rest of the Eurozone.

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Question 1: Do you agree that German current account surpluses are a threat to the Eurozone economy?

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Answer:
Strongly agree
Confidence level:
Very confident
Comment:
The survival of the Eurozone depends upon the balance between the recognition that European polities have to comprise to maintain political stability and the pressures on those polities from the economic stresses caused by the political compromise that the Eurozone represents. If Germany is undervalued then its partners must on average be overvalued, and adjustment to overvaluations in France, Italy and Spain can be painful, as it can only come by having lower inflation that in Germany. None of these countries has a particularly flexible labour market. Unemployment will for a period be higher than otherwise in these countries, and real wage growth will be slower. The current cconomic stresses seem rather high in these countries, and they could go on for some years. This in turn may lead to political threats to the Eurozone, and also to the liberal democracy that has been essential for maintaining the longest period of peace in Europe since the 17th century. As these threats rise, Many people in Europe consider that what has happened so far is better than having their countries invaded by the Germans again, and they are sure if the German polity wishes to control their mineral and industrial assets again they will pay In cash to do so. The balance of advantages may be changing, and a new compromise may be needed, with Germany taking the lead in this. The scale of relative overvaluation depends upon what one judges the private sector structural surplus to be, and in our non-Ricardian world on on the scale of government surpluses. Changing the German public sector surplus would be an obvious step to take to maintain stability and democracy.

Are academic economists ‘in touch’ with voters and politicians?

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Question 7: Voters did not know that there was near-unanimity among economists.

Do you agree that this was an important reason for a majority of UK voters going against the near unanimous advice of the economics profession?

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Answer:
Agree
Confidence level:
Confident

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