Back on September 4th, Mario Draghi was keen to tell anyone who would listen that the ECB alone could not alone act to revive the spluttering eurozone economy. The ECB president raised the issue of monetary intervention and the possibility of increased government investment. In effect, the ECB was in the midst of a shift on policy stance.
On the same day in Paris, the OECD- with little fanfare- released a press statement announcing Catherine L Mann as its new chief economist. The move received little publicity from media outlets at the time, but just two months into her role, Mann is already shifting the tone of an important economic policy voice.
Three years ago, the architects of OECD policy were calling for rates hikes and fiscal consolidation, while this week, Mann´s opening Economic Outlook called for fiscal and monetary stimulus across Europe. The shift could scarcely be more polarised.
Mann´s appointment has clearly sent a statement. Something needs to change-and fast. Mann has previously served as on the board of the Federal Reserve and as an advisor at the World Bank. Possibly most significantly, she studied under the tutelage of Paul Krugman, the New York Times columnist, economist and staunch critic of the EU´s austerity policy.
Krugman spoke this week on his blog about the appointment, heralding it as a belated shift in policy, with Keynesians finally beginning to gain the upper hand over “austerians” as he likes to call to them. While there was an air of satisfied triumphalism in Krugman´s words, he also noted that “all of this may be coming too little and too late to avoid policy disaster, especially in Europe.”
The arrival of Mann as OECD chief economist offers something of a vindication for the likes of Krugman. Throughout the European austerity drive, he has been unrelentingly critical about what he sees as the folly of Europe´s fiscal consolidation programme. The promotion of a disciple to such an important role ensures Krugman and those of his ilk are once again back at the top table surrounding policy debate. Quite the turnaround, having spent years shouting in vein from the sidelines. As if to emphasise the point, Krugman is cited twice in the latest OECD outlook.
Mann´s intervention in the monetary policy debate was not dissimilar to what has long been advocated by Krugman, and came at a point when the arguments about unconventional stimulus have become increasingly intractable. Reading between the lines, Mann´s message was pointed “Stop the fiddling- Rome is burning.”
The OECD´s head of surveillance in the EU, Piritta Sorsa, was on message when contacted by The Corner this week.
“As the euro has continued to disappoint in terms of growth and inflation has remained very weak, the urgency of ECB action has increased. Euro area policy makers need to use monetary, fiscal and structural policies together, with each leg supporting the others, to strengthen demand and put the economy on a stronger sustainable growth path. In each area, there is scope to do more. In particular, the OECD recommends stronger monetary policy stimulus, use of all available fiscal space and more ambitious structural reforms.”
Mann´s report raised the possibility that the ECB may need to buy sovereign bonds in the region of 7% of GDP to reduce long term yields. That suggestion was seen by many as a bid to increase pressure on countries who continue to drag their heels. Sorsa pointed out that the figure in question was an estimate based on data and analyses from other countries who have employed similar measures.
“The exact details of what instruments the ECB uses and how far it should expand its balance sheet will depend on how markets and the economy responds. However, a clear commitment to doing what it takes is needed,” she said.
Piritta Sorsa also highlighted the urgent need for consensus amongst member states while lamenting the economic situation brought about by policy solution thus far.
“Euro area economies are closely interconnected through trade and the financial system. It is difficult for any country to thrive, while the euro area is a whole is weak. There is therefore common interest in ensuring that the euro area is growing and avoids deflationary risks. All the main economies of the euro area are currently performing less well than they should and so they all have an interest in taking action to get the euro zone moving again,” she said.
Yet the message on a need for change remained clear. While acknowledging the concern of some member states about the debt levels and structural problems of others, Soritta asserted that “these problems cannot be easily overcome while demand is so weak. Progress on reforms should be the paired with more supportive macroeconomic policies.”
The report forecast weak growth rates for GDP in 2014 which may improve slowly in 2015, but Piritta Sorsa highlighted
“significant downside risks to this projection. Some key recent indicators point to significant weakness at the end of this year. In addition, there is a risk that demand could be weaker than expected, not least if strong policy action is not taken. It would not take a very large negative shock to delay the recovery, halt the fall in unemployment and to keep inflation at very low levels over the coming years. Further ahead, there is a lot of uncertainty about the medium-term path of the economy,” she stated.
That´s about as blunt as it gets from the OECD. The message could not be clearer. The tide of opinion regarding growth stimulus is turning. The Keynesians are back, and they want government action now. Whether their input can avert stagnation remains to be seen.
Follow Sean Duffy Twitter: @seanied8