Wednesday, 31 August 2011

ECB keeps comparing US to EMU…

ECB keeps trying to save Europe and its policies by comparing its several member countries to states in US. The idea is US is also a sum of its states like EMU is a sum of different countries. So, we need to look at how US states have performed when we look at EMU countries.

In this speech, ECB President Trichet says:

For the euro area it is very common to look at the level of its constituent countries and focus on the diversity among individual states, because a number of economic policy choices that affect productivity are national.

For the US, this exercise is rarely done. It is often conjectured that relevant policies are federal, and therefore by definition uniform at the level of the federation; and that, as a consequence, differences at the state level play much less a role. In essence, it is therefore often assumed that the US economy would be significantly more homogeneous than the economy of the euro area.

Looking more closely at the regional dispersion across US regions and euro area economies does not confirm this. In fact, the dispersion of many of the key indicators is surprisingly similar.

He then compares EMU countries with US states across a few parameters – inflation, house rices,unit labor costs etc and says:

In summary, there are strong indications that economic diversity in the euro area and the United States has not been significantly very different over the past 12 years. The observation that very large, continental economies of the size of the US or of Europe are probably necessarily diverse should not be reason for complacency. The fact that advanced economies of the size of more than 300 million people have a tendency to be significantly diverse calls for a solid economic governance framework and explains why the ECB Governing Council has been so vocal in this ground since the inception of the euro area.

And this inherent diversity of advanced economies of large size is an additional reason to resolutely engage in the structural reforms that would permit to accelerate the completion of the European single market in all sectors, and to enhance the growth potential of each individual European economy and of the euro area as a whole.

Hmm…point well taken.. But then US is a country with combination of federal and state policies whereas in EMU you just have one common policy – monetary policy- and then countries do their own thing in other areas. US is a country but Europe will always remain a sum of countries… …And then the member EMU countries are again a sum of states/provices.. There is a centre in US and none really in Europe with focus always on France and Germany..So there is no real comparison as such…

Anyways, otherwise a very nice speech on growth economics. Looks at large literature on the subject.

In the end he points to 3 issues for long term growth:

Let us get back to our central theme – Setting Priorities for Long-Run Growth. Let me make some suggestions – three to be precise. A first, and overwhelming, priority – notably for the euro area – is the vigorous implementation of structural reforms. A second, but by no means unrelated priority, is the continued attention to external and internal imbalances. A final priority is greater flexibility on the part of policy institutions. Let’s take them one by one, with a particular emphasis on the euro area.

On the last it continues to back ECB policies and says it acted with credible alertness in this crisis. Am not sure about this..ECB’s operations have been impacted severely because of the problems in EMU structure…


by: Amol Agrawal

Source: http://mostlyeconomics.wordpress.com/2011/09/01/ecb-keeps-comparing-us-to-emu/

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