Wednesday, July 6, 2016

UK Exchange Rate Mechanism Crisis 1992

In October 1990, the UK made the decision to join the Exchange Rate Mechanism (ERM)
The ERM was a semi-fixed exchange rate mechanism. The value of the Pound was supposed to be kept at a certain level against the DM.

The exchange rate mechanism was designed as a precursor to joining the Euro. The aim was to keep exchange rates stable; it was hoped this would:
  • Keep inflation low
  • Provide stability for exporters encouraging trade
  • Enable countries to join the single currency - the Euro.

In the late 1980s, the chancellor, Nigel Lawson was keen to join the ERM. But, Mrs Thatcher with her euro-sceptic views wanted to stay out. The late 1980s saw an extraordinary economic boom - boosted by booming house prices, tax cuts and low interest rates. Growth reached record levels of 5-6% a year. Enthusiastic government ministers talked of an economic miracle - hoping Government policies had enabled, at long last, to catch up with other countries like Germany.

Economic growth

However, this miracle was an illusion. High growth was unsustainable and led to inflation.(see: Lawson Boom) With inflation of 10%, Nigel Lawson was able to convince Mrs Thatcher that the UK would benefit from joining the ERM to help reduce inflation.

uk inflation 1980s

Therefore, the UK joined in October 1990. at a rate of DM 2.95 to the Pound.

However, the problem was that the economic situation was declining quickly. The UK was sliding into recession due to falling house prices and an end to the past economic boom.


High inflation and deteriorating economic activity was making the Pound less attractive. Therefore, the Pound kept falling to its lower limit in the ERM. Therefore, the government was bound to protect this value of the Pound by:
  • Increasing interest rates - this attracts hot money flows - it is more attractive to save in UK with high interest rates.
  • Buying pounds with foreign exchange reserves.
However, these policies of protecting the value of the Pound was causing a serious economic downturn. High interest rates particularly hit the housing market. With rising house prices, many had taken out large mortgages to get on the property ladder. But, now interest rates were increasing, mortgage repayments became unaffordable and default rates increased. Combined with rising unemployment from the recession, the housing market saw a dramatic fall in prices that was to last 4 years.

unemployment 1980s

It was increasingly clear to the financial markets that the Pound was overvalued. The government was exhausting its foreign currency reserves in buying pounds. But, more problematically, the high interest rates was causing a serious recession and misery for homeowners.

Financial speculators like George Soros predicted the Pound was doomed, so they were keen to sell their pounds to the British government. (It is said George Soros made £1 billion out of the UK government during ERM crisis)

It became a question of pride for Ministers, with Norman Lamont and John Major pledging to keep the UK in the ERM, seemingly at all costs.


For a long time, the British government fought a losing battle. But, the foreign currency reserves of the British government were no match for the trillions of Pound Sterling traded on the foreign currency and the pound kept sliding. It is estimated that the Treasury used £27 billion of foreign currency reserves trying to prop up the Pound. The Treasury estimated the final cost to the taxpayer was estimated at £3.4 billion.

On one desperate day - Wednesday 16th September, the UK government increased interest rates to 15%. In theory, these high interest rates should attract hot money flows. But, the market saw it for what it was - a measure of desperation. The market knew these interest rates were unsustainable and couldn't be maintained; the sell off continued and eventually, the government caved into the inevitable and left the ERM. The Pound fell 15%, interest rates were cut, and the economy was able to recover.

It is a classic example, of failed government policy. If the UK had joined the ERM at the start of the economic boom in the mid 1980s, the anti inflationary impact would have helped moderate the boom, kept inflation low and prevented a painful readjustment. But, they joined at the wrong rate at the wrong time. Trying to keep the Pound artificially high caused a recession, deeper than any of our competitors. The artificially high exchange rate just attracted financial speculators who saw the British government as a source of easy profit.

On leaving the ERM, the UK economy soon recovered. This was partly due to devaluation, but also perhaps more importantly - interest rates were able to fall significantly.

However, the episode left painful scars and played a key role in keeping the UK out of the Euro. It also shows the mistake of targeting inflation through an intermediary such as the exchange rate. As a consequence of this episode, the government gave the Bank a direct inflation target of 2.5%. The ERM crisis also paved the way to given the Bank of England independence in 1997. The hope was that an independent bank would avoid the excesses of the Lawson boom and bust of the 1980s.

Lessons from ERM

  • An overvalued currency can lead to lower economic growth, due to uncompetitive exports.
  • Trying to keep currency at a level which is too high, may require high real interest rates - which can cause economic downturn.
  • It is hard to buck the market. Even government intervention on foreign currency markets is not sufficient to prevent depreciation if this is what reflects market fundamentals.
  • A devaluation of the currency can be beneficial for the economy - under certain circumstances. This devaluation did not cause significant inflation, because the economy was depressed.



Sunday, July 3, 2016

Benefits of European Union

The European Union is a political and economic union of 28 countries. Originally formed in 1958 by six countries (then the EEC), the EU has expanded in terms of size and integration. The aim of the EU is to promote European harmony through creating a single market, enabling the free movement of goods, services and people.

Some of the benefits of the European Union include:

Broad political and legal benefits
  1. European harmony - European Union countries are no longer at loggerheads like they were in the past. With the exception of civil war in Yugoslavia (which wasn't in the EU at the time), Europe has managed to heal the divisions which were so painfully exposed in the two World Wars in the Twentieth Century. The EU was awarded the Nobel Peace Prize in 2012 for helping to promote peace and international co-operation. Many Eastern European countries are keen to join the EU because they feel it will help promote economic and political stability.
  2. Legal and human rights. The EU has a strong commitment to human rights, preventing discrimination and the due process of law. This makes the EU attractive to countries, such as the Ukraine who wish to share in similar legal and human rights.
  3. Prospect of membership has helped modernise countries, such as Turkey. The Copenhagen Criteria for EU membership enshrine commitment to human rights, rule of law and market economy. The prospect of gaining membership of the EU, encourage countries to implement human rights legislation.
Economic benefits
  1. EU is one of strongest economic areas in the world. With 500 million people, it has 7.3% of the world's population, but accounts for 23% of nominal global GDP.
  2. Free trade and removal of non-tariff barriers have helped reduce costs and prices for consumers. Increased trade to the EU creates jobs and higher income. Over 52% of UK exports are to the EU. Trade within the EU has increased 30% since 1992.
  3. According to one study - over ten years (1993-2003), the Single Market has boosted the EU’s GDP by €877 billion [£588 billion]. This represents €5,700  [£3,819] of extra income per household.
  4. A paper, Campos, Coricelli, and Moretti (2014) used the synthetic counterfactuals method (SCM) pioneered by Abadie and Gardeazabal (2003). The red dotted line shows estimated GDP if the country had not been a member of the EU. This shows that even more prosperous EU countries, such as the UK have benefited from higher GDP as a result of being in the EU.

  5. Removal of customs barriers mean 60 million customs clearance documents per year no longer need to be completed, cutting bureaucracy and reducing costs and delivery times
  6. Countries in the EU, are amongst the highest positions in the Human Development Index (HDI)
  7. Poorer counties, such as Ireland, Portugal and Spain have made significant degrees of economic development since they joined the European Union. A report suggests that  over the period of the 1980s and 2004 enlargement, there are substantial positive pay-offs of EU membership, with a gain in per capita GDP of approximately 12% for poorer countries. (Vox - how poorer countries benefit from EU)
  8. Social cohesion fund. This has invested in poorer areas of the EU to help reduce regional disparities. For example, Ireland benefited from the EU social cohesion fund (over €6 billion of investment in education and infrastructure spending)
  9. EU structural funds to help Eastern European economies develop will benefit the UK in the long term because as they become more affluent, they will be able to buy more UK exports.
  10. The European Union has attracted greater inward investment from outside the EU. Inward investment grew from €23 billion  [£15.4 billion] in 1992 to €159 billion [ £106.5 billion] in 2005. The UK is the 5th largest source of inward investment in the world, and being a member of the single market is an important factor in encouraging Japanese firms.
    he European Social Fund (ESF)
Labour and free movement of people
  1. Free movement of labour and capital have helped create a more flexible economy. For example, UK and Ireland have benefited from the immigration of Eastern European workers to fill labour market shortages in certain areas, such as plumbing, nursing and cleaning. 
  2. Far from 'taking jobs', migration has helped increase productive capacity and makes a net contribution to tax revenues. (see impact of net migration)
  3. Free movement of labour also enables British people to live and work in Europe. Roughly 1.6 million British citizens live in the EU outside the UK (UNCTAD World Investment Report 2010)
  4. EU migrants are net contributors to UK Treasury. EU migrants tend to be young. Therefore pay taxes, but use relatively small share of NHS and pensions. See: Fiscal effects of immigration. Net migration has helped deal with the UK's demographic timebomb.
  5. EU has enabled people to travel freely across national boundaries making trade and tourism easier and cheaper. According to the European Commission, more than 15 million EU citizens have moved to other EU countries to work or to enjoy their retirement.
  6. 1.5 million young people have completed part of their studies in another member state with the help of the Erasmus programme. The possibility to study abroad is considered positive by 84% of EU citizens. (benefits of EU)
  7. Easier to use qualifications in different member countries. This makes it easier to work abroad without having to retrain in different national qualifications.
  8. Mutual recognition of safety standards and rules have helped reduce costs for firms. This has encouraged the development of small and medium business who rely on low cost of exports.
  9. Social charter enshrines protection for workers such as maximum working week, right to collective bargaining and fair pay for employment. 
  10. European Arrest Warrant (EAW) scheme has made it easier to track criminals across the European continent.
Environmental benefits of the EU
  • The EU have raised the quality of sea water and beeches, by implementing regulations on water standards 'Bathing Water Directive'. 92% of tourist locations now meet minimum water quality standards. (Clean water at
  • Tackling global warming. In 2006, the (EU) committed to reducing its global warming emissions by at least 20 percent of 1990 levels by 2020. The EU has also committed to spending $375 billion a year to cut greenhouse gas emissions by at least 80 percent by 2050 compared to 1990 levels. (global warming pdf)
  • Tackling acid rain. Environmental treaties which have sought to deal with European wide environmental problems such as acid rain. The EU has set strict restrictions on emissions of pollutants, such as sulphur, and other causes of acid rain. (BBC Link)
Consumer benefits of the EU
  • EU competition policy has harmonised regulation of monopoly and cartel power within Europe. The EU competition policy seeks to avoid abuses of cartels / monopoly / dominant market power and protect the interest of consumer. There has been successful deregulation of airlines, electricity and gas markets.
  • The EU has reduced the price of making mobile phone calls abroad. In 2007 EU legislation set maximum charges for making and receiving calls.  The EU also agreed with 14 mobile phone manufacturers to create standard design for chargers from 2011 in order to make life easier for consumers and reduce wastage. In 2014, it is has voted to scrap roaming charges which will drastically reduce the cost of using a mobile phone abroad. (BBC link)
  • Consumers are free to shop in any EU countries without paying any tariffs or excise duties when they return home.
So what have the EU ever done for us, apart from straighten all those pesky bananas?

Of interest 


Tuesday, April 26, 2016

Unemployment - A price worth paying for lower inflation?

"Rising unemployment and the recession have been the price that we have had to pay to get inflation down. That price is well worth paying.""
- Norman Lamont, Chancellor of the Exchequer. 16th May, 1991 (Hansard)

Unemployment started increasing in 1990 and rose to over 3 million in 1993.

John Major also said "If it's not hurting, it's not working"

Unemployment vs Inflation is a trade off that policy makers often face. But, this particular statement was widely seen as a political gaffe or just a callous disregard for the costs of unemployment. To make such a bold statement is to suggest the government cares little for the personal cost of those who are made unemployed, but is it justified? and is there any economic rationale behind this?

What is the justification for making this statement?

1. The unemployment will only be temporary and a necessary step to overcome the inflationary pressures in the economy.

If inflation is high, it is invariably necessary to slowdown the economy to reduce inflation. There are no easy ways to reduce inflation. To reduce inflation will require either tight Monetary policy (higher interest rates) or tight fiscal policy (higher taxes and lower government spending.) These policies will reduce aggregate demand and reduce inflationary pressures. However, these will cause a slowdown in growth and rise in unemployment. However, this slowdown is only temporary and after inflation has been reduced and people expect lower inflation, the economy will be able to expand creating low unemployment and low inflation.
  • To some extent N.Lamont will claim to be vindicated by events. Although unemployment rose to 3 million in the early 1990s, inflation was reduced and since then the economy has experienced a long period of uninterrupted growth without inflation and unemployment has fallen.

2. Costs of inflation

It is argued that inflation leads to lower living standards in the long run. High inflation creates uncertainty and confusion about future prices and costs. This tends to reduce business investment and leads to slower growth. High inflation also creates menu costs for the economy and more importantly will contribute to deteriorating competitiveness in the economy. Unless inflation is reduced the economy will always grow at a slower rate than it could with low and stable inflation.

3. Inflation and hysteresis

It is widely accepted that previous inflation rates have a strong bearing on future inflation. If an economy experiences high inflation, people expect high inflation in the future. This becomes self fulfilling as workers demand higher wages and firms push up costs. If inflation is reduced then it becomes much easier to keep it low in the future.

Problems of the statement

1. Unemployment can last for a long time

When the Conservative party came to power in 1979, inflation was over 20% the government implemented high interest rates and tight fiscal policy in an attempt to control the money supply and inflation. They were successful in reducing inflation but at the cost of a deep recession. Unemployment rose to 3 million and high rates of unemployment persisted until the late 1980s. Arguably the social costs of unemployment are far greater than inflation. If there are lower levels of investment it is not as damaging and dispiriting as having no work. The fact that the early 1980s saw many riots in the inner cities show the social problems which unemployment can create.

2. Targeting inflation lacks balance

If your only target is low inflation then the danger is that the monetary authorities will become blind to other economic issues. It is my belief that the 1981 recession was deeper than necessary. The enthusiasm to reduce inflation was overdone; if they had given greater importance to unemployment they would not have persisted with anti inflationary policies for so long. Similarly the 1991 recession was deeper than necessary because of the insistence of remaining in Exchange Rate Mechanism for so long. True, low inflation is important but to target at the exclusion of all else misses the whole point.


One irony of the statement was that the inflation was largely avoidable. The economy was allowed to expand far too quickly in the late 1980s leading to the boom and inflation. If the economic cycle had been better stabilised the government wouldn't have been left with the difficult dilemma.


The danger of targeting only inflation becomes more apparent in a period of stagflation. This means both inflation and unemployment rise due to the Aggregate Supply shifting to the left. In this case, keeping to a low inflation target risks causing a widespread downturn in the economy. In periods of stagflation flexibility may be required in inflation targets, even if this risks reducing confidence in inflation policy.


Wednesday, April 6, 2016

The UK economy in the 1960s

The end of the 1950s was a period of rising living standards, summed up by Harold MacMillan's 'you've never had it so good'

Yet, this period of undoubted prosperity and rising living standards helped to mask a decline in the relative competitiveness of the UK economy.

Rising living standards of the 1960s

UK economic growth in the 1960s. There were brief dips in output, but these were not sustained.

In the 1960s, economic growth translated into rising living standards, with households able to purchase a greater range of 'white goods' and cars. There were new markets emerging, for example, teenagers had greater disposable income to spend on pop music, like the Beatles.

There was also a revolution in transport. At the start of the 1960s a majority of households did not have a private car, but relied on public transport. By the end of the 1960s, car ownership rates had risen from approx. 40% to 60% (RAC - car ownership rates) The first motorway was built in 1958, and throughout the 1960s there was a major road building programme - just as the railway network was severely cut back.

Compared to current prices, housing was also still cheap. Helped by a boom in post-war house building, owning a home was an affordable aspiration for both the middle class and working class. (Average house prices in 1969, £4,328). During the 1960s, home ownership rates increased.

Declining competitiveness

However, despite higher economic growth, the UK performed relatively poorly compared to our major competitors, such as Germany, Japan and US roared ahead UK productivity growth was relatively lower due to several factors. such as:
  • Lack of willingness / ability to innovate
  • Poor industrial relations with a growing number of days lost to strike action. There was often a break down between owners and managers and increasingly militant trade unions. Some argue this was exacerbated by Britain's class system. Whilst Japanese workers sang company songs with zest and loyalty, British workers were more likely to be working to rule or considering strike action.
  • Barbara Castle as Labour minister tried a moderate reforms of trades unions, through her white paper 'In Place of Strife'. However, the unions effectively lobbied Labour ministers and the reform bill was blocked. 
  • Complacency. Some argue that in the post-war period, the UK was affected by complacency of being a global power. This complacency was in stark contrast to the defeated countries of Germany and Japan, who put greater energy into business. The UK was also hampered by coming to terms with letting go its Empire and trying to join Europe. In the 1960s, two applications to join the EEC were vetoed by the French.
  • Lack of public sector infrastructure. Burdened by high post-war debt, the UK struggled to invest in new transport and technologies. For example, the UK was still relying on steam trains until the mid 1960s - later than many other countries who made switch to cheaper and more efficient electricity and diesel.
 Balance of Payments

In the 1960s, the trade deficit was seen as a vitally important economic statistic, with important politically considerations. Unfortunately, for the Harold Wilson government of the 1960s, the UK trade deficit was embarrassingly large - a result of the decline in competitiveness and a wish to retain a strong pound. Campaigns like 'Buy British' were surprisingly prominent, but, ultimately failed to make any real dent in the trade deficit. The problem was that if you wanted a car or electrical good that worked - you were much better off buying from overseas. If we made jokes about Skodas and Ladas in the 1980s, British Leyland was the butt of many jokes during 60s and 70s.

Full employment

See: Historical unemployment UK

Despite the economic weaknesses of the 1960s, it was still an era of full employment and rising real wages. Compared to the rest of the Twentieth Century, the 1950s and 60s were a rare period of full employment. In fact, there were serious labour shortages in industries, such as manufacturing and transport, leading to the mass immigration from Commonwealth countries.


Inflation in the UK in the 1960s

UK inflation in the 1960s was relatively benign. This was helped by low global inflation. However, towards the end of the 1960s, we start to see a rise in inflation. This rise in inflation was partly caused by devaluation, which tends to push up prices because imports are more expensive.

Devaluation of 1967

Throughout the 1960s, the government were committed to keeping the value of the Pound high. This led to relative high interest rates and intervention in foreign currency reserves. However, efforts to keep the Pound strong, ultimately failed, and in 19 Nov, 1967, the government were forced to devalue the Pound. The Pound was reduced from $2.80, to $2.40, a cut of 14%. It was considered a political embarrassment, though it was necessary given the declining competitiveness. Harold Wilson made a major announcement telling people:
"It does not mean that the pound here in Britain, in your pocket or purse or in your bank, has been devalued." (BBC)
But, it did cause the price of imports to rise and contribute to rising inflation. It was also hoped the devaluation would tackle
"Our decision to devalue attacks our problem at the root and that is why the international monetary community have rallied round."
However, although it proved a temporary boost in competitiveness. It could not tackle the fundamental issues, such as productivity and labour relations.

The experience did seem to sum up the 1960s. - not bad - but, could have done better - and we certainly weren't as good as everyone else.

See more on Devaluation of 1967

National Debt in post war period

National debt in 1960 106.7% of GDP - By 1970 this had fallen to 64.2% of GDP

After the Second World War, the UK was left with huge debts. National debt as a % of GDP exceeded 200% of GDP in the early 1950s. Britain was reliant on loans from the United States. Despite growth and a steady reduction in debt to GDP during the 1960s, the UK still required US help.

Undoubtedly, had it not been for the necessity of borrowing from the US, Harold Wilson would have been freer to be more critical of the Vietnam War - as he told his cabinet on why he would not criticise the war - 'You can't afford to kick your main creditor in the balls' - or words to that effect.

The 1970s

But, if the late 1960s were difficult, the 1970s proved to be one of the most difficult economic decades since the 1930s. It was an era of industrial confrontation, rampant inflation, an unexpected oil shock and an unwelcome return of mass unemployment. The economic power of the UK was exposed for what it had become.... ( - UK economy in 1970s )


Sunday, January 31, 2016

The Lawson Boom of the late 1980s

Between 1985 - 1988, UK economic growth was well above the long run trend rate of 2.5%. By 1990, inflation had increased to 9.5%.
  • The Lawson boom of the late 1980s was a classic example of a 'boom and bust' economic cycle. The late 1980s were a period of rapid economic expansion. This was caused by rising house prices, tax cuts, lower interest rates and high confidence. 
  • However, the boom cause a rise in inflation and a larger current account deficit.
  • Policies to tackle this inflation caused the recession of 1991-92.
The Lawson boom followed from the  recession of 1981. This recession particularly affected the manufacturing sector, and caused unemployment to rise to 3 million. By 1985, unemployment was still over 2.5 million people. However, from 1986 the government made various decisions which helped to inflate the economy causing an inflationary boom.

Economic growth in 1980s


Causes of the Lawson Boom

Tax Cuts

In 1988, the chancellor Nigel Lawson reduced the basic rate of income tax from 29% to 25%. The higher rate of income tax was cut to 40%. The tax cuts were so large, the 1988 budget is often referred to as the 'giveaway budget'. The chancellor was helped by good revenues from North Sea oil.

The effect of these tax cuts was a fiscal stimulus which helped to increase disposable income and consumer confidence. This led to a rise in consumer spending and economic growth.

Over optimism

During the 1980s, the government felt that they had presided over an 'economic miracle'. They felt that the last recession had removed a lot of inefficient firms. They also felt that supply side policies, such as privatisation, had been effective in increasing the productivity of the economy, and therefore had increased the long run trend rate of growth. This belief encouraged the chancellor to believe the economy could grow at a much faster rate than previously. Therefore, when growth increased above 4%, they did little to slow down an overheating economy. They believed (or hoped) that the long run trend rate of economic growth had increased from 2.5% to 4%. As Nigel Lawson said in his budget speech 1988.
"In 1987 as a whole, output grew by getting on for 4½ per cent., rather more than the rate of inflation which averaged 4.2 per cent. At the same time, unemployment fell faster than in any other year since the war, in every region of the country, and more than in any other major nation.
The plain fact is that the British economy has been transformed. Prudent financial policies have given business and industry the confidence to expand, while supply side reforms have progressively removed the barriers to enterprise." (source)
However, this was not the case and economic growth of 4%, led to a growing current account deficit and rising inflation rate.

2. A reluctance to increase interest rates

In the 1980s, interest rates were set by the Chancellor (not the independent Bank of England, like now) In October 1987, there was a stock market crash. In one week 25% of the stock market value was wiped out. There was no obvious economic cause of this, but the government was worried of its macro economic implications. As a result interest rates were reduced, to avoid any downturn. As it happened the stock market crash had little macro economic effect and the economy continued to grow very fast. But, the impact of that cut in interest rates in 1987 was to encourage the boom - and in particular the housing boom.

3. Exchange Rate Mechanism ERM

The ERM was another factor keeping interest rates lower than they should. Mrs Thatcher didn't want to join the ERM, however the Chancellor Nigel Lawson wanted to follow an unofficial exchange rate of 3 DM to £1. This often proved to be a factor in preventing interest rates from rising. The Chancellor didn't want to increase interest rates because it would break the 'unofficial exchange rate'

4. The housing boom

The relatively low interest rates and the high consumer confidence sparked a housing boom. During the boom years, house prices rose by 300% (and more in places like London). Q4 1988 was the peak of the boom period with house prices rising over 30% at an annual rate. This boom in house prices caused a rise in household wealth and increased confidence. Equity withdrawal rose to record levels, which helped increase consumer spending.

Rising interest rates meant mortgage payments in the late 1980s took over 50% of disposable income.

By 1988 and 1989, the economy was growing at 5% a year (almost double the long run trend rate) Despite signs of overheating, the government were reluctant to react. Interest rates were increased, but not as quickly as they could have. Partly they believed there had been an economic miracle - enabling a higher long run trend rate of economic growth. But, also Nigel Lawson, didn't want higher interest rates to boost the value of the Pound above the 'unofficial exchange rate' he was following. This was a policy known as shadowing the D-Mark. However, the fast growth meant that inflation started to creep up, eventually reaching 11% in 1990. With inflation at 11%, interest rates were increased further, but this caused mortgage payments to increase and the confidence evaporated as many people found they couldn't afford the mortgage repayments.

Current account deficit


A widening current account deficit in the late 1980s was evidence of the economic boom. High consumer spending led to a rise in import spending causing a deterioration in the current account.

Higher growth led to a bigger current account deficit. In 1989, the current account was 4.9% of GDP - reflecting the fact the economy was overheating and consumers were buying from abroad; domestic suppliers could not meet the rising demand.

Unemployment in the 1980s

UK unemployment fell during the Lawson Boom(1985-89) But rose as interest rates were increased in 1990.


The 1980s was a missed opportunity and the recession of 1991 unnecessary. By the mid 1980s, the government had reduced inflation - through a deep recession. There had also been some supply side reforms which helped aspects of the economy. Privatisation and reform of trades unions did help increase productivity and efficiency. However, these improvements were nothing like enough to enable a 'supply side miracle'. The main lesson of the Lawson boom was that the government made a big mistake in allowing the economy grow too fast, leading to inflation and an unsustainable boom. The consequence of this boom, was a painful recession as belatedly the government tried to bring inflation down again.

Other notes on this period.

  • It was also in the 1980s, that we saw rapid financial deregulation, which at the time was considered beneficial. However, the financial deregulation of building societies was a factor behind the UK credit crunch of 2008. 
  • The Lawson Boom also saw a period of widening inequality - helped by cuts to tax rates for high earners.
  • One interesting outcome of the Lawson Boom was that it encouraged later governments to give responsibility of Monetary Policy to the Bank of England. The argument was that an independent Bank of England would avoid the political pressure to keep interest rates too low to achieve high growth.


Sunday, December 6, 2015

How does austerity affect the economy?

Several countries have recently implemented 'austerity packages' - attempts to reduce government spending and increase taxes, in an effort to reduce their budget deficit. It was hoped these austerity packages would 'restore confidence', improve countries fiscal position and enable long-term recovery.
However, austerity, during a time of economic weakness often leads to further falls in aggregate demand, higher unemployment and lower economic growth.
  • In some cases, austerity to reduce a budget deficit can be self-defeating, with sharp falls in real GDP, causing debt to GDP ratios to continue to rise. 
  • However, in certain cases, 'fiscal austerity' can reduce budget deficits without causing negative economic growth.

Austerity in the 1930s

Main impact of austerity

Lower demand. A cut in government spending and higher taxes will lead to lower aggregate demand and lower economic growth. If there is a fall in output, firms will employ less workers leading to higher unemployment. Also, government spending cuts may involve making public sector workers redundant. In addition, media coverage of 'austerity measures' tend to reduce consumer and business confidence. Fears over job losses and expectations of lower growth will encourage consumers to save rather than spend . This will be a further drag on consumer spending and economic growth (See also: paradox of thrift). As a result of austerity measures in 2011, the OECD now forecast negative growth of -0.8% for the Eurozone in 2012.

Eurozone growth - hit by austerity post 2008.

Lower inflation. Spending cuts will tend to lead to lower inflation. Firstly, the fall in aggregate demand (AD) will lead to lower inflationary pressures in the economy. Also, if the government limits public sector wages, this will put downward pressure on wages. Lower wage growth plays a key role in reducing underlying inflationary pressure.

Competitiveness. It is hoped that austerity measures will help create greater pressure to reduce costs. These lower costs can help improve competitiveness. This is important for countries in the Euro, such as Ireland, Greece and Spain. In the boom years, they became uncompetitive leading to lower export demand and a current account deficit. Measures to deflate the economy should make exports more competitive. Ireland has been relatively successful in improving competitiveness, this is reflected in their move from a trade deficit to trade surplus. However, this attempt to improve competitiveness through lower inflation may take several years, and involve a high cost of lower growth and unemployment.

Irish GNP

source: Ireland Triumphs, NY Times, Krugman, P.

Ireland has been one of more 'successful' countries which has embarked on austerity, but this shows GNP is still significantly below pre-crisis levels (when real GNP was growing at an average rate of close to 5% a year)

Budget deficit. Higher taxes and lower spending will lead to an improvement in the government's budget deficit. This will help improve public finances in the long term.

However, if austerity measures cause lower economic growth, the government will also see a fall in cyclical tax revenues. e.g. increasing tax rates, should increase revenue. But, if higher taxes cause a recession, there will be less people working and so income tax revenue may actually fall. Also, if austerity measures cause unemployment, it will require higher government spending on benefits.

UK National debt as % of GDP, continued to rise despite austerity measures of 2010-12/

The UK's budget deficit fell slower than expected. This was partly because growth forecasts proved overly-optimistic. The austerity measures led to a slowdown in growth.

Distributional impacts

Austerity may not affect everyone in society equally. The biggest losers will be those who are made unemployed. Fiscal austerity will tend to hit the lowest paid the most because they will be most affected by stagnant wage growth. People in jobs with good long-term contracts may be insulated from downward wage pressures and growth in zero hour contracts.

What determines the impact of austerity?

Labour market flexibility. If labour markets are flexible, it may be easier to cut wages, and labour costs. This may make it easier to restore competitiveness and restore economic growth. However, if there is great resistance to lower labour costs, it will be much harder to restore competitiveness. But, labour market flexibility may lead to lower wages and worse working conditions.

What spending is cut?
If a government cuts spending by raising the retirement age to 70, then this will not lead to lower growth. In fact it could help increase labour supply and increase productivity. However, if the government cut spending on current infrastructure investment, this will have a much greater impact on reducing domestic demand and lead to lower economic growth.

Monetary policy. Austerity involves lower domestic demand. However, if monetary policy can be loosened (e.g. lower interest rates or increased money supply) then the deflationary effects of spending cuts can be offset. For example, in the Euro, countries like Greece have fiscal austerity, but there is no corresponding loosening of monetary policy (e.g. the ECB increased interest rates in early 2011 and didn't pursue any quantitative easing). By contrast, the UK has more flexibility because the Bank of England pursued quantitative easing.

There have been successful cases of fiscal austerity - where it has been accompanied by a corresponding fall in interest rates and/or devaluation in the exchange rate.

Exchange rate. Austerity is not as damaging if a country can devalue the exchange rate. This devaluation helps to restore competitiveness much quicker than relying on internal devaluation. The depreciation helps boost export demand. Countries in the Euro, can't devalue and so have to rely solely on internal devaluation to restore competitiveness.

Global growth
. Austerity is not as damaging if the rest of the world economy is doing well. If global growth is strong, export demand will be strong. However, if all countries are experiencing a recession, then deflationary fiscal policy will have a greater impact in reducing domestic demand.

Central Bank intervention
. Countries in the Euro, without a lender of last resort, are having to cut spending much quicker than countries outside the Euro. This is because bond yields on Euro debt has risen very quickly because markets fear liquidity shortages.

Rising Eurozone bond yields forced faster austerity. Though since 2012 the ECB has intervened more in bond markets giving countries a little more room for maneouvre


Saturday, October 10, 2015

Should we worry about national debt?

Governments have been borrowing for centuries. The figures for national debt are staggering. In the US, National debt is over $11 trillion. In the UK, debt is over £1.1 trillion. From a personal perspective, we are brought up to believe debt is a bad thing, and therefore it often feels worrying that national debt can be so large. But, how much should we worry about these levels of national debt?

One argument says that an increase in the national debt doesn't cause any problems. What happens is that by borrowing we merely enable the present taxpayer to enjoy a higher disposable income now rather than in the future. A cut in the national debt, would mean higher taxes now, rather than later. Therefore, national debt is just a way to spread national output amongst different generations. To understand national debt, it is important to remember how it is financed. Government debt is essentially a transfer from one part of the population to another. (Who owns national debt?)

Source: Reinhart, Camen M. and Kenneth S. Rogoff, “From Financial Crash to Debt Crisis,” NBER Working Paper 15795, March 2010. and OBR from 2010.
Historical national debt

Furthermore, national debt has been much higher in the past. During the Second World War, the national debt of the UK and US, reached very high figures of over 150% of GDP. In the UK debt in the late 1940s reached over 200% of GDP. This is an example, of how a country can borrow during times of a national crisis and pay back the debt over a period of time. National debt can be an effective way to deal with economic shocks such as recessions, financial crisis and world wars.
It is worth bearing in mind that in the 1940s, as well as paying for post war reconstruction, the UK set up the NHS and welfare state. There was no austerity panic in the 1940s! The high government debt levels of the 1940s and 1950s were not a barrier to the post war boom years of the 1950s and 1960s which saw record levels of economic growth.

Therefore government debt is not necessarily a barrier to economic growth and prosperity. But, it is also important to point out that there is no guarantee that borrowing 150% of GDP will always lead to two decades of economic prosperity. The UK nearly went bankrupt in the late 1940s, and was saved by a loan from the US. see: Why could UK borrow so much in the 1940s, and could we do the same again?

Debt and budget surplus


It should also be remembered UK debt as a % of GDP fell from 200% of GDP to 40% of GDP (over a period of 40 years) - despite rarely having a budget surplus.

Growth and debt

Another factor is that economic growth usually makes it easier to pay back national debt. If GDP increases faster than national debt, then we need a smaller % of incomes to pay the debt interest payments. If GDP growth averages 2.5% a year, then increasing national debt by 2.5% means we will spend the same percentage of income on debt payments (assuming constant interest rates)
  • An analogy. When I took out a mortgage loan of £140,000, I was left with mortgage payments of £800 a month. In 2004, this was nearly 40% of my income. However, if my income increases by 3% a year. In 20 years time, it will be much easier to pay that mortgage payment of £800, it will hopefully be 15% of my income. To buy a house, it makes sense to borrow a mortgage and pay back over 30-40 years.
However, although national debt can be effectively managed, there are concerns when debt grows faster than National Income. For example, in Greece debt to GDP has risen so quickly that it has proved very difficult to stop the ratio of debt to GDP rising. (partly because spending cuts to reduce the deficit, caused lower GDP)

The fear for Eurozone economies, such as Italy, Portugal and Greece is not the levels of government borrowing, but the very poor prospects for economic growth. If the economy is stagnant, debt to GDP will continue to rise. If the economies were growing strongly, it would be much easier to reduce the debt to GDP ratio. (See also: Eurozone crisis)

Does higher borrowing cause higher bond yields?

As UK debt rose from 35% of GDP to 80% of GDP. Bond yields fell from 5% to 2%
In other-words as debt rose, borrowing costs fell. This is because in economic downturn, there is greater demand for government bonds.

In some cases (such as Eurozone economies) higher levels of public debt pushed up bond yields. Higher bond yields are damaging to the economy. It increases the cost of debt interest payments and is a reflection investors are nervous about the liquidity of government debt. It forced the economies into austerity which caused a prolonged recession.

However these countries with rising bond yields were in the Euro and did not have a Central Bank to buy bonds and ensure liquidity. In fact in 2012, the ECB took effective action to bring down bond yields (through unlimited purchases)

Countries with their own currency and Central Bank (e.g. UK and US) have the ability to purchase bonds and ensure liquidity. In the UK, the sharp rise in government debt between 2007 and 2012, led to a fall in bond yields. This shows that higher borrowing doesn't have to translate into higher bond yields.

 UK Bond yields and UK borrowing

Why is there greater demand for government debt in a recession?

The UK has seen a fall in bond yields during the recession of 2008-12. This is because, in a recession, private sector saving rises. Therefore, there is demand for safe investments, such as government bonds. In a recession, people don't want to take risks, therefore demand for shares and private investment tends to fall. In a recession, government borrowing doesn't tend to cause crowding out. Government borrowing is merely mopping up private sector saving.

From a Keynesian perspective, government borrowing can help to boost aggregate demand and offset the fall in Aggregate Demand. In a recession, borrowing can provide a boost to economic growth and therefore, help improve tax revenues.

Possible reasons to be concerned about government borrowing

1. Structural deficit. If government borrowing reflects a fundamental dis-equilibirum between spending and tax revenue then this may lead to unsustainable debt levels in the future.

2. If borrowing is to finance welfare payments with an increased level of dependency. Paying pensions and health care to an ageing population, will do nothing to facilitate economic growth and improve tax revenues, and it will become more difficult to finance the national debt. Some are concerned that countries like Japan have a high debt (over 220% of GDP), but also a rapidly ageing population which will put even more pressure on Japanese debt levels.
  • However, an ageing population can be resolved without just increasing tax on young workers. The retirement age can be increase to keep the same% of population in workforce.

3. Inflationary Pressure. There is a concern that higher levels of national debt can cause inflation. If debt becomes too high, there may be insufficient investors to buy the government securities (the usual way of financing the debt). Therefore, the government may be tempted (or forced) to fill the shortfall in revenue by printing money. Printing money and increasing the money supply, will lead to inflation. The problem with inflation, is that it devalues the value of bonds, people will sell bonds, leading to higher interest rates on bonds and higher debt interest payments. If investors see inflation is getting out of control, people will not want to hold bonds. Foreign investors will sell their securities and this will cause a devaluation in the currency. This is particularly a problem for the US, where foreign countries hold a high % of the national debt.The hyperinflation of Germany in 1922-23 was caused by the government printing money to finance reparation payments to the allies.
  •  However, it should be pointed out, this hyperinflation is quite rare and only occurs if the government prints money recklessly without regard to the fundamental economic situation. Quantitative easing in 2009-12 didn't cause inflation in the UK and US. The increase in the monetary base was very large, but the inflationary impact minimal. - Inflation and quantitative easing.
4. Crowding Out. It is argued that if government borrowing increases, it will cause crowding out of the private sector. If the private sector buy bonds it means the private sector has less funds for private sector investment. Also, if borrowing increases, interest rates may rise. Higher interest rates also reduce private sector spending and investment.
  • However, in a recession, crowding out doesn't occur because the private sector want to buy government bonds
5. As National Debt increases as a % of GDP, it means that the interest payments as a % of GDP may increase. Therefore, higher levels of taxes have to be spent on just financing the national debt.

However, this doesn't necessarily occur. The UK has seen fairly stable interest payments as a % of GDP, despite rising debt levels. In a recession, bond yields tend to fall, therefore it becomes cheaper to borrow. See debt interest payments

Conclusion - should we worry about government debt?

It depends when and why the government are borrowing. In a recession, with a fall in private sector demand, a rise in government borrowing is beneficial for maintaining aggregate demand in the economy. If private sector spending fell and we also tried to reduce government borrowing, we could see a precipitous fall in aggregate demand, and a deep recession. See: Austerity can be self-defeating.

If the government is borrowing to finance public sector investment, then this can lead to improved economic growth and better tax revenues in the future.

When should we worry about government debt?
  • If the government increases debt during a period of economic growth - the higher borrowing is likely to crowd out the private sector and lead to a decline in private sector investment.
  • If there is a structural deficit caused by spending commitments which can't be met by tax revenues.
  • If the government responds to higher debt by printing money; this can cause inflation. e.g. case of Zimbabwe, Germany 1920s. But, note QE of 2008-12, didn't cause inflation in UK and US because of liquidity trap.


Friday, June 13, 2014

How to deal with an ageing population

An ageing population means the government needs to spend more (on pensions and health care) it will also receive lower income tax.

If the government does nothing it will experience a rise in the structural budget deficit. This has many problems

1) Resource crowding out. government borrow from private sector so private sector have less to spend and invest. Furthermore the private sector is usually more efficient than government

2) Financial crowding out.
To Borrow more money the government may need to increase interest rates, to make sure people buy enough debt. The problem is that this will put upward pressure on general interest rates and causes lower spending and growth in the economy.

3) Increase the national debt and annual interest payments. Italy already borrows over 100% of GDP. The effect is that a high % of GDP goes on servicing the debt, which will only increase over time.

4) It will require higher taxes or lower spending for future generations.

Policies to deal with an Ageing Population

Option ONE Make people work longer.

This could involve increasing the retirement age from 65 to 70. From an economic point of view this is beneficial because it leads to more tax revenue (people will pay income tax for longer) and more consumer spending. Also, the government can delay paying pensions saving substantial funds. Also, increasing the retirement age increases the supply of labour; this could be a benefit in labour markets where there is a shortage of skilled (experienced) workers.

The main problem with this policy, is that it will be highly unpopular, especially from people who are nearing retirement age. People may say the government is going back on its word to provide pensions at a certain age. In the UK, the government has pledged to increase the retirement age to 67, but this will not come in for a long time and therefore does not tackle the short term debt.

Another problem with increasing the retirement age is that it will affect different types of workers differently. A manual labourer will find it difficult to keep working until 70. But, for an office worker it will be easier. Also, many well paid workers will be able to afford to take a private pension early.

Option TWO - Increase income tax

If the government increase income tax rates, they will increase tax revenue to pay for the higher pension bill. However, higher income tax may lead to lower work incentives. It may discourage people from living in a certain country. Because income tax is relatively low in the UK, a higher rate may not reduce incentives that much; however, there is a high opportunity cost of taxing for pensions. Pension spending does not increase productivity in the economy.

Option THREE - Means tested pensions.

This means pensions are targeted just to those on low incomes, and those who do not have a private pension. This helps to reduce inequality and reduce the total cost of pensions.

However, it creates a very big incentive for people not to save and avoid getting a private pension. This is because if you did save, you would receive little from the government. Therefore, in the long run it may make the situation worse

Option FOUR - Encourage private pensions

Governments could make it obligatory for firms to provide a private pension. Alternatively, they could give more generous tax breaks for private pensions. This is good for reducing the governments pension burden. The concern is that some people may not have sufficient private pension provision when they retire. Therefore, there is still a need for government provided means tested pensions.

Related pages

Tuesday, January 21, 2014

Liquidity Trap Explained

A liquidity trap occurs when low / zero interest rates fail to stimulate consumer spending and monetary policy becomes ineffective. In this situation, an increase in the money supply could fail to increase spending because interest rates can't fall further.

A liquidity trap means consumers' preference for liquid assets (cash) is greater than the rate at which the quantity of money is growing. So any attempt by policymakers to get individuals to hold non-liquid assets in the form of consumption by increasing the money supply won't work.

For a long time, the macro-economy was managed by changing interest rates. So it is quite a shock for policy makers to experience a situation where their main policy tool was no longer sufficient. Hence the range of unorthodox monetary and fiscal policies.

Liquidity Trap 2009-14

In the UK, Base interest rates were cut to 0.5% in March 2009. For a considerable time, the economy remained in recession. Helped by quantitative easing and a devaluation in the Pound, there was a weak recovery in 2010. However, 2011 and 2012 saw a fall in the rate of economic growth. This period is a good example of a liquidity trap.


Interest rate cuts to 0.5% did little to create a strong economic recovery.

Money Supply Growth in Liquidity Trap

Despite quantitative easing boosting M4 growth by 10% in 2010, M4 growth has been very low. See also: Explaining Paradoxes of UK economy

Why do Liquidity Traps Occur?

  • Expectations of deflation. If there is deflation or people expect deflation (fall in prices) then real interest rates can be quite high even if nominal interest rates are zero. - If prices are falling 2% a year, then keeping cash under your mattress means your money will increase in value. The difficulty is in having a negative nominal interest rates (banks would be paying you to borrow money). There have been attempts to create a negative interest rates (e.g. destroy money in circulation but in practice it is rarely implemented.
  • Preference for Saving . Liquidity traps occur during periods of recessions and a gloomy economic outlook. Consumers, firms and banks are pessimistic about the future, so they look to increase their precautionary savings and it is difficult to get them to spend. This rise in the savings ratio means spending falls. Also, in recessions banks are much more reluctant to lend. Also, cutting the base rate to 0% may not translate into lower commercial bank lending rates as banks just don't want to lend.
  • Credit Crunch. Banks lost significant sums of money in buying sub-prime debt which defaulted. Therefore, they are seeking to improve their balance sheets. They are reluctant to lend so even if firms and consumers want to take advantage of low interest rates, banks won't lend them the money.
  • Unwillingness to hold bonds. If interest rates are zero, investors will expect interest rates to rise sometime. If interest rates rise, the price of bonds falls (see: inverse relationship between bond yields and bond prices) Therefore, investors would rather keep cash savings than hold bonds.
  • Banks Don't pass Base Rate cuts onto consumers
In liquidity trap, commercial banks may not pass base rate onto consumers.

How to overcome a liquidity trap

Thursday, January 9, 2014

UK economy forecasts for 2014

After faltering for several years, the UK economy shows signs of real recovery, with rising spending, investment, exports and even manufacturing growth. At the start of 2014, there seems to be a virtuous circle of falling unemployment, falling inflation, and rising GDP.

After one of the longest and deepest recessions on record, these signs of economic growth are definitely welcome, yet it is far from a return to normality. Real GDP is still 2% below its 2008 peak, and the economy is being propped up by zero interest rates, quantitative easing and a strong housing market. Stagnant wages and poor productivity growth have led to one of the most prolonged periods of declining living standards in memory. Although there is economic recovery, there is still a fear that the recovery is unbalanced, and that the UK economy could be derailed by problems in the Eurozone and future government austerity measures.

I have produced an in depth look of the UK economy in 2014 on my other blog.

Quick forecasts for 2014

  • Economic growth 2.5% (BBC link)
  • CPI Inflation - 2.4% ( - average of forecasts)
  • Unemployment - 7%
  • Current account deficit - £ - 48bn
  • PSNB - £ 88bn
  • House prices - 8% (Rightmove) IHS Global Insight (8%)
  • Interest rates - 0.5%  (on hold whilst unemployment is above 7%) PWC
  • Average earnings - real average earnings expected to decline for 6th year according to PWC

Reasons to be optimistic in 2014

  • There are strong signs of economic growth, with the possibility of growth rates returning to the UK's long run trend rate of 2.5%. This will cause a virtuous circle of higher investment and spending.
  • Signs of recovery in manufacturing and exports, give the hope of a more balanced economy
  • The UK economy has signs of flexibility to prevent rising unemployment we are seeing on the continent.

Reasons to be pessimistic in 2014

  • The economy is still weak and requires propping up with ultra loose monetary policy
  • The EU economy is still very fragile and could cause damage to the UK economy in 2014.
  • Elements of the recovery suggest it may not be sustainable, especially the mini housing boom, and the widening trade deficit
  • Prospects of more austerity in 2014 could derail the recovery before it is strong enough.

Wednesday, November 6, 2013

Q.E. is it a timebomb waiting to happen?

A reader asked for my take on this BBC radio programme (30mins) on Q.E. I really don't know what will happen when Q.E. ends, but this is my summary of programme and thoughts on Q.E. so far.

Risks / Criticisms  of Q.E.
  • The new inflow of money into commercial banks from quantitative easing has encouraged banks to use this extra money through greater risk taking. 
  • Bond traders have benefited from making large profits out of the Bank of England by manipulating the bond market.
  • Because government debt is being financed by quantitative easing, the government has less market discipline to think about reducing fiscal deficits
  • Quantitative easing has been a stealth method of reducing the value of the Pound and Dollar – and therefore making UK exports cheaper. Some commentators call this currency manipulation (or currency wars).
  • The increase in money supply has led to an unexpected rise in commodity prices, such as oil, leading to cost-push inflation.
  • By depressing interest rates, quantitative easing has wiped out people’s return on savings
  • Quantitative easing is causing inflation in the UK, and when the velocity of circulation rises, these extra bank balances will be lent – causing a possible inflationary surge.
  • The scale of quantitative easing could make it impossible to sell bonds back to market and this will damage the UK’s ability to borrow in the future.
  • Evidence in US, suggests even raising the possibility of tapering could cause damage to the bond market, and higher interest rates rates. 

Defence of Q.E.
  • There is no real evidence that there has been a surge in risky bank lending. – A more potent criticism of Q.E. is perhaps that it did so little to increase commercial bank lending.
  • We need fiscal expansion not austerity. It is a very good thing if Quantitative easing has reduced the need for austerity and immediate measures to cut budget deficits.
  • No currency manipulation. It is hard to accuse the UK of currency manipulation when we have a current account deficit of nearly 3% of GDP.
  • Inflation has not been a macro-economic problem since 2008. The main macro-problem has been significant fall in GDP and unemployment. The Bank of England are correct to concentrate on these real problems.
  • Europe inflation still too low. Inflation in the ECB is 0.8% – that is still low and creates the risk of deflationary pressures. This suggests the ECB have done too little money creation and have pursued too tight monetary policy.
  • Unemployment in the Eurozone is 12%, significantly higher than the UK. UK unemployment may well be higher, if we hadn’t pursued quantitative easing.
  • Future inflationary surge? It is true that if the velocity of circulation rises, there could be inflationary pressure. But, given the level of unemployment and spare capacity in the economy, the inflationary surge is hard to see.
  •  More on Risks vs Benefits of Q.E.

UK Recovery - weak or strong?

There are different ways of looking at the UK recovery. Firstly, we can look at the damage done to the economy since the peak in 2008.


In Q3 2013 GDP was estimated to be still 2.5% below the peak in Q1 2008. From peak to trough in 2009, the economy shrank by 7.2%. This is an unprecedented length of economic stagnation – compare this recession to great depression of 1930s.

Could recovery have come earlier?

There is a strong case that the signs of recovery in 2009/10 could have been maintained with more careful policy.


A strong bounce-back

Another way of looking at the recovery is to concentrate on 2013. This looks much more promising, with the economy expanding 1.8% in the first three quarters. After five years of declining GDP, this is a great relief. The government might use this ‘strong recovery’ as vindication for their policies of austerity.

Criticism of German economic policy

Recently, the US Treasury criticised German economic policy. They argue that German’s export led growth model and anaemic pace of domestic demand is damaging to European and global growth.

“Germany’s anaemic pace of domestic demand growth and dependence on exports have hampered rebalancing at a time when many other euro-area countries have been under severe pressure to curb demand and compress imports in order to promote adjustment,”
“The net result has been a deflationary bias for the euro area as well as for the world economy.” (BBC link)


It might seem a bit of a paradox for the US to criticise other countries economic policies, when their own arguments about the debt ceiling threatened to push the US and global economy back into recession. But, why is the US criticising German economic policy and is it justified?

 US deficit


The surprising decline of the US budget deficit.

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