Luis Arroyo sent me the following graph:
I get frustrated when I read people arguing the Eurozone problem is that the ECB can’t come up with a one-size-fits-all policy stance. As if monetary policy is too tight for just a few small stragglers on the edge of Europe, comprising just a few percent of the Eurozone GDP. Actually money is even tighter in Europe than in the US. It’s too tight for every single Eurozone member. Nominal GDP is well below the levels of early 2008. Obviously in that situation many people, businesses and governments will have difficulty repaying their nominal debts. Look at the path of nominal income before the crisis (blue line); that’s the income trajectory that people and governments were expecting when they contracted their nominal debts.
Obviously several small countries made extremely foolish decisions. Greece faked its national accounts and Ireland agreed to bail out bank creditors. So they’d be facing some problems under the best of circumstances. But without the big drop in NGDP the Eurozone debt crisis would be far smaller, indeed would be relatively easily contained with a few bailouts.
How ironic it’d be if the ECB destroys the euro it was set up to protect, by obsessively trying to raise its value. They should have consulted King Midas.
Or perhaps Hayek, who warned what would happen if nominal incomes were allowed to decline.
HT: Thanks to Luis, and to Niklas Blanchard who finally taught me how to right-size graphs.