> Under a gold standard, yes. But John Maynard Keynes and Harry Dexter
> White got rid of the gold standard. In large part the reason they got
> rid of the gold standard was to make deficits the problems of surplus
> as well as of deficit countries. As Bob Rubin and Larry Summers used
> to say: don't balance down, balance up. Europe and Japan need to
> loosen policy and accelerate their growth to boost their imports
> (from America).
But Europe has a relatively low propensity to import (and Japan's is even lower). So in order to absorb all those US exports, Europe would have to see a very big expansion of its income, which would mean a substantial reduction in unemployment. Yet the ECB believes that Europe's unemployment is structural - that it can't be reduced without "increasing wage differentials, easing job protection laws and changing tax and benefit systems" (quoting an ECB report released Monday). (And frankly it seemed like Rubin and Summers didn't entirely disagree - their standard formula in public statements was to say Europe needs to coordinate macroeconomic stimulus with structural reforms.)
So the question is: What happens if the hour arrives when Europe (and Japan) need to reflate RIGHT NOW but the structural reforms haven't happened yet? Do you think the ECB will be willing to junk its whole economic philosophy for the mere sake of avoiding a deep world recession?
Seth