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"We Would Have Gotten Away with Austerity--If Not for Those Meddlesome Economists!" -- European Commission Vice President Olli Rehn

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European Commission Vice President Olli Rehn complain that Olivier Blanchard killed the Confidence Fairy. No Scooby Snacks for you, Professor Blanchard!

Jonathan Portes: Not the Treasury view...: I pointed out late last year that European Commission Vice President Olli Rehn has been predicting for at least two years that, thanks to the excellent policies recommended by the Commission and the European Central Bank, economic recovery in the crisis economies of the eurozone is imminent.  However… he's tried a different tack. Blame the economists…. Rehn… says:

I would like to make a few points about a debate which has not been helpful and which has risked to erode the confidence we have painstakingly built up over the last years in late night meetings. I refer to the debate about fiscal multipliers, ie the marginal impact that a change in fiscal policy has on economic growth.  The debate in general has not brought us much new insight.

Much of the rest of the letter is devoted to Mr Rehn's (and presumably the Commission's economists) attempt to debunk the findings of IMF Chief Economist Olivier Blanchard, who found, to no-one's great surprise, that the adverse impacts of fiscal consolidation were indeed much greater than that forecast by the Fund or the Commission.

I… would note…

  • as I said here, it is quite true that on its own the Fund analysis doesn't demonstrate that the Commission and Mr Rehn (and here the Treasury, Bank and OBR) are wrong.  But the whole weight of the evidence, both theoretical and empirical, does.
  • while Blanchard's analysis is far from the end of the story, it is a professional piece of work by one of the world's leading empirical macroeconomists.  The Commission's rebuttal, by contrast, would, as I say here, shame a first-year Masters' student. [Briefly, for nerds, including sovereign yields as a "control variable" for growth outcomes is so obviously misspecified - yields are an outcome, not an exogeneous independent variable - as to be a straight fail.]

But of course the really surprising thing is that Mr Rehn should be writing to Finance Ministers, and the IMF Managing Director, complaining that an academic paper on a very policy-relevant, but highly technical issue of empirical macroeconomics, represented "debate which has not been helpful"…