Thursday, July 03, 2014

The Fed and the eurozone

Brad DeLong in The World’s Central Banker Project Syndicate 07/30/2014 points to the growing strength of xenophobic, nationalist parties in the European Union:

This is not in Europe’s interest, and it is not in America’s interest to have to deal with such a Europe. A democratic, prosperous, and stable Europe implies a much better and safer world for the US.

Here is where the Fed comes in. By shifting its monetary-policy regime to target 4% annual inflation – or 6% annual nominal GDP growth – the US would set in motion rapid rebalancing in the eurozone. Rather than see the 30% euro appreciation that would follow from the ECB’s current monetary policy, German exporters would scream for measures to prevent America’s “competitive devaluation,” finally bringing about moderate inflation in the north rather than the current grinding depression in the south.

A world in which the US has a proven record of honoring the trust that is required of it to play the role of global economic hegemon is a much better world for the US than one in which it is not trusted. Simply put, the US must manage the global economy for the collective common good, or else confront a world in which global macroeconomic management results from race-to-the-bottom national policy struggles.
In other words, such a policy by the Fed would create pressure on Angela Merkel's government to do what needs to be done in the interest of the eurozone and of Germany itself.

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