Did you think that the policy of fighting recession by increasing austerity was now intellectually bankrupt? No one seems to have told the Dutch central bank. (Hence the deliberately provocative title of this post.) The latest forecast by the Bank says:
- The economy will shrink by 0.8% this year, followed by growth of 0.5% next, ‘accelerating’ to 1.1% in 2015
- The unemployment rate will rise sharply, reaching a peak point at 7.2% of the labour force midway through 2014
- The budget deficit will increase from 3.5% this year to 3.9% next
What should the government do about this? The central bank says ‘The forecast course of the factual and structural deficit in 2014 does not meet the recommendations given in May by the European Commission to correct the excessive budget deficit in the Netherlands. Extra consolidation measures are therefore necessary.’
Unfortunately the central bank is being entirely predictable in continuing to urge austerity as the economy weakens. In earlier posts (here and here), I noted how the central bank’s advice was rather different from the Dutch CPB (Bureau for Economic Policy Analysis), which clearly does employ macroeconomists. What is just so depressing is that the central bank seems oblivious to the increasingly overwhelming evidence that austerity during a recession is the complete opposite of what you should be doing in a country without its own monetary policy. Unlike some other Eurozone countries, there is no market pressure forcing policymakers’ hands in the Netherlands.
If you think this is excessively rude, please read my own checklist on the subject. I am not disdainful of those in 2010 who thought austerity was necessary because either a debt crisis was around the corner, or economic recovery had been assured, and have subsequently done what Keynes suggested should be done when the evidence becomes clearer. I think they were wrong back then, and said so, but it was an understandable mistake, and even the best economists make mistakes. But I’m afraid to continue in 2013 to advocate a course of action which anyone can see is doing immense harm to so many people is just inexcusable. If you understand this, and are a macroeconomist working for this or another European central bank with similar views, then you have my sympathy. If you work for one of these banks and think I’m being too harsh, please tell me why in comments. But more importantly, let’s hope that Dutch politicians treat this advice, along with the recommendations of the Commission, with the contempt it deserves.
This blog was first published on Mainly Macro