Oh dear. Reinhart and Rogoff may wish to avoid ever holidaying in Greece, Portugal, or Spain. Their seminal (and now-disproved) paper – arguing that once a country’s public debt was over 90% of their GDP, there is a strong negative relationship with the country’s economic growth – probably took up a fair amount of the Troika’s discussion time when it was deciding on the measures the peripheral countries needed to take if aid were to come their way.
Of course, Reinhart and Rogoff were not the only ones to argue that high government debt is bad for growth. Over the years, several economists have pointed out that government borrowing can crowd out private investment, and that reducing government borrowing can allow growth to resume. Read more
It may not be a bright, sunny day for the UK economy, but with Thursday’s news of a surge in economic growth in Q3, perhaps we can be forgiven for feeling that at least the clouds have parted. And believe me, Londoners will take “partly cloudy” when we can get it.
This uptick in GDP growth marks Britain’s emergence from a double-dip recession, and I have to say it feels like there is a real shift in policy focus off the back of that one number. The preliminary estimate from the Office for National Statistics put GDP growth at 1.0% for the third quarter of 2012. It was well above consensus estimates in the range of 0.6% to 0.8%.
This marks the first quarter of expansion since the third quarter of 2011, and it’s the fastest rate of growth in five years. What’s behind the surprise increase? Probably the Olympics. Read more
Earlier this week, I participated in an economics panel at the Principal Global Investors Summit Series held in Des Moines, Iowa. There was a question posed that bears repeating. A client asked what the impetus would be for the ECB to engage in quantitative easing, or QE, as has been seen from the Federal Reserve and other central banks.
The key to answering this question is Germany and its central bank, the Bundesbank. Given Germany’s scarring experience with hyperinflation in the 1920s, the Bundesbank’s sole target was to keep inflation under control. Nicknamed “The Bank that Ruled Europe” because of its size and relative importance, the Bundesbank was the model on which the ECB was built. It essentially dictated the newly formed ECB’s monetary policy set-up, which is why the ECB has such strict inflation targets and now stands out as one of, if not the, most hawkish of the world’s central banks. The ECB’s inflation target, it’s unfortunate to say, I think is probably one of the reasons that Europe is in the trouble it is.