November 26, 2014


OCED says ECB runs contractionary monetary policies

Pretty good stuff from the OECD this year. Forget the media reports. They always write about the forecasts, and miss the truly interesting bits– in this case a characterisation of a totally mistaken monetary policy stance by the ECB, which the OECD judges to be contractionary in contrast to those of the US, the UK and in Japan.

The interesting snippet is contained in the table on page 17, of which we reproduce a subset. We left out Japan and the US for space reasons, but included the UK, which makes an interesting contrast. We also left out a few measures so we can focus on those that are surprising. See the report for the full list with footnotes and definitions.















Output Gap







Crisis-related hit to potential GDP







real short-term i/r rate minus

real neutral interest rate







implied monetary stimulus incl QE







The eurozone’s output gap estimate for 2014 was a negative 3.3%. The Japanese number was much lower, almost zero, which is what happens after 20 years of stagnation. It becomes normal. Also note the third row, the difference between the real-short term rate minus the real neutral interest rates. It is marginally positive in the eurozone, while it is significantly negative in the UK. The consequence is that the monetary policy in the eurozone is contractionary, while it is extremely expansionary in the UK.

And then this. A fiscal stimulus is at least in part self-financing:

“Fiscal stimulus could be at least partly self-financing (as a permanent increase in potential output implies a permanent increase in taxes) in the presence of hysteresis, high fiscal multipliers and sustained low real interest rates.”

The endorsement was not complete. Ever striving for balance, the OECD cautioned that such a strategy involved risks, such reduced private investment and vulnerability to market shocks.

On the eurozone, the report stepped up the volume of its warning of a long period of economic stagnation. The OECD’s central message is one that will almost certainly not be heeded: to deploy all policy instruments in the support of economic growth. The OECD went so far as to say that the eurozone should slow down the consolidation – but then then added “within the EU fiscal framework”.  France and Italy got support from the OECD, commenting that the slower rhythmof budget consolidation is justified given the low growth perspective. In France this was celebrated as a vindication of the French position.  Michel Sapin said now that the IMF and the OECD support the French position, the only one France still has to convince is the European Commission, which is to give its verdict on the 2015 budgets this Friday. It is now likely that the Commission will postpone its verdict by a couple of months to give the countries time to prove their credibility.

On an aside, just as this report came out, Wolfgang Schauble reiterated Germany’s commitment to a fiscal surplus. It was promised during the election campaign, and it will be delivered, he told the Bundestag during the annual budget debate. He also said that the German economy was operating close to capacity. 

Our other stories

We also have stories on Artur Mas gambit for Catalan independence; on the banking rescue costs for Spain; on the ever so slightly recovering French business climate indicator; on the first day of Paris talks between troika and Greece; on Portugal’s tax revenues this year; on the German financial stability report; on the passing of the Italian labour reforms; and on a warning against unbalanced structural reforms.

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