Thursday, June 24, 2010

Now Trichet Disses Keynes


The Keynesian notion that governments can just spend an economy into prosperity is properly being dissed by more and more European leaders. First you had German officials decrying the concept, now European Central Bank President Jean-Claude
Trichet is speaking up against Keynesianism and supporting the fiscal responsible direction that Germany has chosen to go in.

Those who argue that the fiscal austerity measures being implemented by many European governments will lead to economic stagnation are wrong, Trichet said in an interview published Thursday morning, according to Market News Internatioanl.

To the contrary, countries must begin cutting their deficits in
order to restore confidence, which is necessary for economic growth,
Trichet told Italy’s daily newspaper La Reppublica.

Trichet was asked about the view of some economists that there is a threat of deflation hovering over Europe. “I don’t think that such riskscould materialise,” he said. “On the contrary, inflation expectations are remarkably well anchored in line with our definition — less than 2%, close to 2% — and have remained so during the recent crisis. As regards the economy, the idea that austerity measures could trigger
stagnation is incorrect.”

He added, “everything that helps to increase the confidence of households, firms and investors in the sustainability of public finances is good for the consolidation of growth and job creation. I firmly believe that in the current circumstances confidence-inspiring policies will foster and not hamper economic recovery, because confidence is the key factor today.”

Trichet said it is a “good” thing that Germany is taking measures to cut its deficit. “I am pleased that the German government is concentrating on discipline. And what I think about Germany also applies to the others,” he said. “The delicacy of the current situation requires credible measures; this is very important,” he added. “Sustainable fiscal policies will help to consolidate the recovery.”

Trichet also said the measures announced by Italy late last month “go in the right direction.”


  1. PANIC

    US NATIONAL DEBT 13,048,581,000,000 $

  2. Wenzel,

    We need your interpretation here, is this some kind of headfake? Why would the man who controls a money-printing machine be talking about his unwillingness to use it? What happens when these debt problems aren't resolved via growth in the eurozone? Does Trichet stick to his guns?

    Is this a realpolitik move to get some capital into the eurozone in a panic?

    Taken at face value, this is confusing, but even trying to understand what Trichet is really saying and why is not much clearer. Your thoughts?

  3. RW may have over-reacted. Trichet is saying that governments should reduce "deficits" implement "fiscal austerity" and that "...confidence is the key factor today.” That last line sounds a lot like FDR.

    All of these pretty words are like Obama's when he promises to balance the budget as soon as the economy is strong.

    Until I see governments actually slashing spending, Keynesianism still lives.

  4. Efinancial,

    I agree, though I am also open to the possibility that slashing spending could be attempted as a realpolitik form of allowing one state to survive as a "relative sound financing" zone, only to crank up Keynesianism again when all other competitors (which might otherwise have drawn off fleeing capital) are nothing but ashes.