Monday 2 April 2012

The European Commission asks the wrong people the wrong questions. No wonder it gets the wrong answers

Last week representatives of the European Commission came to see me and colleagues at NIESR to discuss the economic prospects for the UK.  We had a sensible discussion, during which time I expressed my view that slowing fiscal consolidation would boost growth and employment without posing any significant risk to fiscal credibility, and that in this respect the Budget was a missed opportunity. When I made this point, the head of the delegation said that they had seen the ratings agency Fitch that morning, who took a different view.

At this point, I'm afraid, I slightly lost my cool and said in no uncertain terms both what I thought about the ratings agencies and what I thought of the Commission for spending time listening to them and, presumably, taking account of their views in their final report. I subsequently emailed the Commission representatives to set out my thoughts in more considered fashion.  Here they are (only slightly edited to put them in context): 
"Thanks for coming in to see us yesterday. I hope you found it useful.
Just for the record, I would like to make it clear that I was absolutely serious in what I said in our discussion about Fitch. It is my view that for you to meet with Fitch (or other rating agencies) as part of your information gathering for your forecast and policy recommendations is not simply a waste of time, but positively irresponsible and damaging. 
These agencies have repeatedly been proved wrong; they have flawed and frequently conflicted business models; and their ratings have no predictive power.  All this is well established. Moreover, when it comes to assessing sovereign debt "credit risk" they - and I mean this quite literally - do not know what they are talking about. By that, I mean they quite simply don't understand what they themselves are saying.  See my blog here for an explanation. 
It is simply not, I am afraid, a justification for you to say that you listen to a "diverse range of views". You have limited time, and you have to be selective. Who you choose to talk to, and listen to, is in itself an economic and political (small p) choice - this is obvious.  
There are plenty of very serious and competent economists here in London who you will not have time to talk to; some of them broadly agree with me, some don't. Why, for example, are you not seeing John Van Reenen, Director of the Centre for Economic Performance at the LSE, and co-Chair of the LSE Growth Commission? John wrote an excellent article on the Budget here. There's more sense in every paragraph here than in everything Fitch, Moody's and Standards and Poors have said over the past year about the UK.
Similarly, why not talk to Ian Mulheirn (Social Market Foundation, ex-HMT), who wrote this FT piece.   I don't entirely agree with it, but it's a sensible contribution to the debate. And if you want somebody who disagrees with me about the case for fiscal loosening now, talk to Roger Bootle (Capital Economics), who is always thoughtful and well-informed on UK macro issues, even if I disagree with him on this specific point. 
These are serious people with serious things to say (and I could name half a dozen more). By choosing to spend your time instead with people who are both structurally biased and serially incompetent, and whose track record clearly shows their irrelevance (at best), you both bias your report and you reduce its quality.  That is bad for the Commission as well as the broader policy debate.  
As you will have noticed, I don't mince my words. I am genuinely trying to help you improve the quality of your analysis, and I hope you take it in that spirit."
Now I don't think it really matters that much what the European Commission says about the UK economy one way or the other. But that is unfortunately not true of the eurozone, where the Commission, especially Commissioner Rehn, the ultimate boss of the people I met, has got pretty much every single major economic policy decision of the last two years wrong.  

Their single-minded focus on austerity in the face of recession - in Greece, Ireland, Portugal, and now Spain - has made a bad situation much, much worse.  Again, there are plenty of excellent economists in the UK pointing this out, from Simon Wren-Lewis here to Jason Rave here. But the Commission seems neither to talk to or listen to them either.  If they insist on asking the wrong questions, and listening to the wrong people, there is little hope that they will get it right in future. 

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