Can a first year economics student please take over EU economic policy?

Imagine, if you will, an economics student taking an introductory macro exam with the following question:

1. In econaria unemployment, already at historical highs a year ago, has persistently risen over the last year, by a full percentage point in all. Meanwhile inflation has fallen, somewhat erratically, over the past year. The public authorities are revising down their growth forecasts and warning of the risk of recession in the econarian economy in the coming quarters.

A: Economic policy is too tight and should be made more expansionary or less restrictive.

B: Economic policy is set just right.

C: Economic policy is too loose and should be tightened.

I suspect that at least 90% of first year students would choose A – and probably wonder why economics has the reputation of being difficult.The remaining <10% fail the exam. Either they read at least some of the course material before taking the resit or they consider a change of career.

Now ponder today’s numbers for the euro area.

SEASONALLY ADJUSTED UNEMPLOYMENT RATES (%)
TOTALS
Oct 2011   –       May 2012       Jun 2012       Jul 2012       Aug 2012      Sep 2012    Oct 2012
10.4        –             11.3                11.4                11.5               11.5               11.6            11.7

and

Euro area annual inflation (HICP), %

Nov 2011  -   Jun 2012    Jul 2012    Aug 2012   Sep 2012    Oct 2012   Nov 2012
3.0         –      2.4                2.4              2.6             2.6               2.5               2.2

And then the recent forecasts by the public authorities:

European Commission euro area growth forecast (November): -0.4% (2012) and 0.1% (2013)

OECD euro area growth forecast (November): -0.4% (2012) and -0.1% (2013)

Given that 90% of first year economics students would be of the view that economic situation described by these data implies a need for less restrictive or more expansionary policies,  obviously the European Commission, in its Annual Growth Survey 2013 thinks that we are on the right track and the reform momentum must be continued:

Key messages

The EU economy is slowly starting to emerge from the deepest financial and economic crisis in decades. However, although important action has already been taken and positive trends are beginning to emerge, we remain some distance from a recovery. To restore confidence and return to growth, it is essential that Member States maintain the reform momentum, and for this reason the Commission recommends focusing on the same five priorities that were identified in last year’s Survey:

The first of these priorities? Pursuing differentiated, growth-friendly fiscal consolidation…

The first AGS, for 2011, was an unmitigated disaster and played a central role in driving the austerity agenda across Europe. Its failure was predicted at the time. Alas, it seems little has been learned since. An alternative is urgently needed. Can a first year economics student please take over EU economic policy?

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  • CDR

    The given data doesn’t help much. It could e.g. be a result of an increase in productivity. Less effort in workforce and lower prices are strong signs. If we see rising stocks and markets as well, we’ll have to assume we’re witnesses to a new kind of booming economy. That means, we’re right on track or even a little bit too loose. Furter investment will help further streamlining and thus will lead to even more unemployment, which we don’t know how to handle yet.
    Of course, we can also assume, investors are dumb and do not invest in machinery and better productivity. If so, we’d expect a strong demand for workforce if we loosen economic restrictions.
    As stated before, the given data is not sufficient for a correct answer.