Thursday, August 22, 2013

Output Gap

I was watching a discussion (German) between Berndt Lucke of the euro sceptical AfD with some CDU person, who kept asking how much Lucke's plan will cost. Lucke at least has a plan. I don't like it, but his party is the only one which actually has one. So, I asked myself just how much has the incompetence of our leadership cost us already, through policies which kept GDP growth below potential.

So, how much GDP have we lost, because of underperforming crisis managers in the eurozone? Well, there seems to be a lot of variation in potential output, depending on which papers one reads. I chose to go with the ECB (pdf) (period 1991-2004 medium term). The reason behind that is simple: it will make monetary policy based on its numbers. Also, I will use the average of the five years before the crisis (2003-2007) of actual growth. The "rescue" policies began in 2010, therefore I will start at that year. The GDP numbers come from eurostat and I have included the 2013 forecast.

ECB Average
Euro area 2.2 2.2
Germany 2.1 1.7

First up Germany:

We started out really well, clearly above potential. Well, until we made the choice that our crisis solving approach is the only one feasible. Turns out is was not, so Germany will have lost around €19 billion euro by the end of 2013, when using the average of the five years before the crisis; and with the ECB potential GDP it will be over €50 billion in 2013 euros.
The eurozone as a whole fared much worse. Both the average and the potential indicate that leadership incompetence cost the countries around €600 billion.

So, really CDU people should not worry too much about the cost of other ideas. They should look at the mess they have helped cause and start actually focusing on growth. This is real money lost through an approach, which completely failed to deliver, what was promised.  In 2014 this gap, or let's call it leadership incompetence tax, will increase for the eurozone, if nothing is done to get growth going. But, hey, let's just do some more totally pointless troika trips; that is just going to cost a measly additional €75 billion next year. I hope they get to see some really fascinating misery for that kind of money!

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