Sunday, July 29, 2012

Oh Dear

Paul Krugman unearths evidence that European Central Bank Chief Mario Drahi's grasp of economics may be as dubious as his grasp of aerodynamics. Drahi:

The euro is like a bumblebee. This is a mystery of nature because it shouldn’t fly but instead it does. So the euro was a bumblebee that flew very well for several years. And now – and I think people ask “how come?” – probably there was something in the atmosphere, in the air, that made the bumblebee fly. Now something must have changed in the air, and we know what after the financial crisis. The bumblebee would have to graduate to a real bee. And that’s what it’s doing.

One hundred years ago aerodynamicists didn't understand bee flight, so Drahi's ignorance on that point might be justifiable for an economist. Bees, of course, have had a few hundred million years to master aerodynamic tricks unknown to students of flight a century ago. On the other hand we might hope that he is more up to date on economics.


The thing is, we know pretty well why the bumblebee was able to fly: massive capital flows from the core to the periphery, which led to an inflationary boom in said periphery, and which therefore also allowed the German economy — which was in the doldrums in the late 1990s — to experience a big gain in competitiveness and hence a surge in its trade surplus without needing to go through painful deflation. This meant, in turn, modest inflation in the eurozone as a whole — slightly above 2 percent over 1999-2007...

And as for graduating to a real bee — that will take time that Europe doesn’t have.