Peer Steinbrück, the German finance minister, has ridiculed the UK’s VAT cut and accused Gordon Brown of ‘crass Keynesianism’ in cutting VAT by 2.5 percentage points. He argued that the fiscal stimulus will raise the level of UK public debt to such an extent that it will take a generation to pay off. Gordon Brown has dismissed the attack as ‘internal German politics’, a stance that was given some credibility when Angela Merkel threw her weight behind a €200bn Europe-wide fiscal stimulus plan, seeming thereby to contradict the views of her own finance minister.
Brown’s VAT cut just crass Keynesianism, say Germans Guardian (11/12/08)
Germany attacks ‘depressing’ UK economic rescue Times Online (11/12/08)
Brown hits back at German criticism of his economic rescue plan ahead of summit Times Online (11/12/08)
Angela Merkel plays Scrooge. Thank goodness Times Online (11/12/08)
Angela Merkel throws weight behind Brown’s fiscal stimulus approach Guardian (11/12/08)
Questions
- Why may the boost to aggregate demand from the fiscal measures announced in the pre-Budget report be less than the Chancellor hoped?
- What would be the effect on the budget deficit if the Chancellor had given no fiscal boost to the economy and the recession, as a result, was deeper?
- Can Keynesianism ever be “crass”?
- How would you design a fiscal policy for maximum impact in combatting a recession?
New figures from the Centre for Economics and Business Research show that the UK has slipped from the fifth to the sixth largest economy in the world as measured by GDP. This places the UK behind the USA, Japan, China, Germany and now France. Two years ago, the UK was fourth largest (ahead of China). However, is GDP the most appropriate measure of the success of an economy?
Zut! France leapfrogs UK in economic table Times Online (7/12/08)
UK drops below first France and then Italy in world GDP league table CEBR News Release (8/12/08)
Questions
- Explain the difference between GDP, GDP per capita and GDP measured on a purchasing-power-parity basis.
- Explain why “….. overvalued sterling has inflated the UK’s claims to be among the top five world economies.”
- Discuss whether GDP per capita is the most appropriate measure of economic success.
Paul Krugman won the Nobel Prize for Economics in 2008. He won the prize for his analysis of trade patterns and location of economic activity, but he is also well known in academic circles for his work on international finance. In the article below, he looks at the foundations of the current financial crisis. He explains the history of the crisis, the action that has been taken by governments around the world, the likely success of the policies and also the impact of the crisis on the real economy. This is perhaps the issue that is of most concern to us as economists. With recession having taken a grip on many countries, it is important for governments to understand the root causes of the crisis to ensure that their policies address these. The article is an edited extract from The Return of Depression Economics and The Crisis of 2008, by Paul Krugman.
We all go together when we go Guardian (6/12/08)
Questions
- Examine the role of the US housing market in the origins of the current financial crisis.
- What is meant by the ‘shadow banking system’? How does the regulatory approach to the shadow banking system differ from that of the mainstream banking system?
- “What’s really worrying is the loss of policy traction: the economy is stalling despite repeated efforts by policy-makers to get it going again.” What does Krugman mean by policy traction? Discuss the possible causes of this policy traction.
- Explain why Krugman believes that the financial rescue package will not be sufficient to turn the US economy around.
- Assess Krugman’s argument that the only way out of the crisis is a “good old Keynesian fiscal stimulus”..
The global financial crisis has led to a significant number of countries going into recession. Recession is defined by economists as two successive quarters of negative economic growth. Banking collapses and a collapse in consumer confidence, and therefore expenditure, have reduced aggregate demand. This situation has been exacerbated as each country’s exports fall due to the slowdown in other countries. The combination of these and other factors has led to negative economic growth resulting in recession. We have linked below to a range of news articles looking at different countries that have fallen into recession in recent months.
Germany
German economy now in recession BBC News Online (13/11/08)
Germany tumbles into recession as exports dive Times Online (13/11/08)
Germany slides into recession Guardian (13/11/08)
Eurozone
Threat of worst postwar slump grows as major economies enter recession Times Online (14/11/08)
Eurozone officially in recession BBC News Online (14/11/08)
Eurozone tumbles into first-ever recession Times Online (14/11/08)
Spain
Spain has that shrinking feeling as economy heads south Times Online (20/11/08)
Economic clouds gather as Spain faces recession Times Online (6/12/08)
Japan
Japanese economy now in recession BBC News Online (17/11/08)
Global slowdown and resurgent yen finally drag Japan into recession Times Online (18/11/08)
Japan in sharpest plunge to recession since war Times Online (28/11/08)
Japan slides into recession as global slowdown hits exports Guardian (17/11/08)
Singapore
Singapore officially in recession BBC News Online (21/11/08)
Hong Kong
Hong Kong slides into recession BBC News Online (14/11/08)
Questions
- Choose one of the countries above and analyse the principal reasons why it went into recession.
- Discuss whether a fiscal policy or a monetary policy stimulus will be more effective at boosting aggregate demand in a country that is in recession.
- Assess policies that the governments of the countries above could use to minimise the impact of recession on the level of employment in their country.
Governments around the world have been reacting to the global financial crisis by cutting interest rates in the hope that an expansionary monetary policy will help prevent recession or perhaps minimise the length, depth and severity of recession. In the articles below, we look at interest rate cuts in some countries, but there are many others. Why not use Google news or an equivalent site to try to find some more examples?
Europe
ECB rate cut sets tone for worldwide attempt to spark stalled economies Times Online (5/12/08)
Is the ECB dragging its heels? BBC News Online (4/12/08)
ECB cuts eurozone rates to 2.5% BBC News Online (4/12/08)
Sweden
Sweden, like us, seems to have things in hand Times Online (5/12/08)
Sweden cuts interest rates to 2% BBC News Online (4/12/08)
mesSweden cuts interest rates to 2% BBC News Online (4/12/08)
Australia
Australia cuts interest rates to seven year low Times Online (2/12/08)
Thailand
Large cut in Thai interest rates BBC News Online (3/12/08)
China
China’s central bank cuts rates BBC News Online (26/11/08)
Questions
- Explain the transmission mechanism whereby cuts in interest rates are transmitted to an increase in consumer expenditure.
- Using diagrams as appropriate, show how interest rates are determined in the money markets.
- Discuss the relative effectiveness of monetary policy and fiscal policy in boosting consumer expenditure.
