Beppe Grillo's Blog

A future as European Unemployed

photo: me and Joseph Stiglitz

The head of the Central European Bank, Jean Claude Trichet has declared that the Bank “is ready to start removing the stimulus to the economy” and thus to increase interest rates from December.

That the European Bank has been stimulating the economy, very few people have been aware, especially in Italy, but that now it is proposed to remove this stimulus to the economy seems to me like a banker’s gag.
Shouldn’t his task be exactly the opposite? If interest rates rise, the cost of money rises, as do the possibility to invest, the capacity to pay mortgages and loans at variable rates and also unemployment.

However this is not the opinion of Trichet who considers the operation to be “preventative” to fight inflation if this were going to increase, and that in fact it will give a boost to employment.

It’s a shame that this has never happened.

Yesterday at lunch, this was set out clearly for me by Joseph Stiglitz, Nobel prize-winner for the Economy, adviser to Clinton and author of a book that I advise you to read: “The Roaring Nineties”. I uselessly tried to explain to him why Fazio is Governor of the Bank of Italy.

“Restrained inflation corresponds to a rate of unemployment near 10%.
Why is the Central European Bank increasing interest rates?
It has never been demonstrated that this action has a positive impact on inflation. The increase in the rate of interest will mean that people buy more Euros, so they will increase in value, but exports will go down. I think that the Central Bank is trying to counter inflation with the wrong tools. The effect will be an increase in unemployment.”

The rate increase will surely counterbalance the deficit in some countries and Italy is a champion in getting the deficit out of a hole.
Thus I advise the Central Bank to get rid of Fazio instead of increasing interest rates. If this doesn’t happen, how many unemployed people will say thanks to Fazio?

Comments

Dear Beppe Grillo,
First of all I would like to thank you for the great job that you are doing in mantaining this small space of free press in italy. As many Italian economists I had to leave my country and emigrate to US in order to continue my studies: I find really usefull your blog in order to see what's going on in my native land.
However, this time I don't agree with your analysis.
There is a strong empirical evidence that an increase in the interest rate reduce inflation: the general view is that inflation can be directly controlled by the central bank by changing the interest rate.
On the other side a change in the interest rate seems to have effects on unemployment in the short run but not in the long run. There is a large debate whether the monetary policy can be used to reduce the effects of business cycle on the unemployment rate but it is largely recognised that it cannot be used to reduce the structural unemployment (what Stiglitz would call "Natural Rate of Unemployment"). In this moment the EU is experiencing an expansion which will be naturally followed by a recession. The role of the central bank in this moment is to struggle inflation with high interest rate so that it can lower the interest rate when the recession will come. The central bank can't do anything more than that. If the level of unemployment in Italy is so high, this is due to structural economical characteristics and to historical and political reasons.. nothing to do with the central bank.
Please let me know if you want some references to empirical studies.
Thanks,
Luigi Pascali

Posted by: Luigi Pascali | November 25, 2005 06:12 PM

Saluti da Finlandia!

Stupendo!!!!

Posted by: Tiina Kaarela | November 24, 2005 07:14 AM

Ciao Beppe
I think You are doing A SUPERB job considering that
(as you also say it) you are a comedian.
I'm italian but I've lived in New York for 20 years and I really don't know what the hell is going on with the italian economy anymore ( I still struggle to understand
Americas economy too...).
I'm for once leaving the states this year to move back to europe ( don't know where yet precisely ).
I know Italy is doing really bad but as long as you are around (god bless you!) It's the only reason why I'm considering "the old boot" again!
Thanks,Thanks,Thanks for you honest voice!!!
PS
I grew up with your shows and I've always liked you !

Posted by: Moreno Visini | November 23, 2005 06:01 PM

hey Beppe,
you'll have to open up a university soon if all these guys come to talk to you to understand italian economy ;)

Posted by: david furlan | November 21, 2005 11:30 PM