No debate please, we're Europeans

[Updated March 6, 2013.  Mr Rehn's letter and this post sparked a lot of further debate/comment, in particular Karl Whelan's excellent Forbes piece here and Paul Krugman here and here. Apparently Krugman's comments, in particular, have irritated the Commission considerably, as the FT describes here. Mr O'Connor - Mr Rehn's spokesperson - doesn't exactly put up a strong defence, appearing to confuse the 1930s and the 1940s (I've asked him via twitter to explain what he meant). On the substance, I think Kevin O'Rourke says all that's needed.]

I pointed out late last year that European Commission Vice President Olli Rehn has been predicting for at least two years that, thanks to the excellent policies recommended by the Commission and the European Central Bank, economic recovery in the crisis economies of the eurozone is imminent.  However, this week - perhaps noting that outside the financial markets, the light at the end of the tunnel that he is fond of referring to appears to be receding - he's tried a different tack. Blame the economists - and in particular, economists who want actually to use proper, theoretically based and empirically grounded analysis to critique the Commission's policies.  Mr Rehn, in a letter to European Finance Ministers, copied to other international financial luminaries like Christine Lagarde, says:

"I would like to make a few points about a debate which has not been helpful and which has risked to erode the confidence we have painstakingly built up over the last years in late night meetings. I refer to the debate about fiscal multipliers, ie the marginal impact that a change in fiscal policy has on economic growth.  The debate in general has not brought us much new insight."

Much of the rest of the letter is devoted to Mr Rehn's (and presumably the Commission's economists) attempt to debunk the findings of IMF Chief Economist Olivier Blanchard, who found, to no-one's great surprise, that the adverse impacts of fiscal consolidation were indeed much greater than that forecast by the Fund or the Commission.

I won't attempt a point by point rebuttal, but would note the following:

• as I said here, it is quite true that on its own the Fund analysis doesn't demonstrate that the Commission and Mr Rehn (and here the Treasury, Bank and OBR) are wrong.  But the whole weight of the evidence, both theoretical and empirical, does.  Our estimates of the impact of self-defeating austerity are here. 

•  while Blanchard's analysis is far from the end of the story, it is a professional piece of work by one of the world's leading empirical macroeconomists.  The Commission's rebuttal, by contrast, would, as I say here, shame a first-year Masters' student. [Briefly, for nerds, including sovereign yields as a "control variable" for growth outcomes is so obviously misspecified - yields are an outcome, not an exogeneous independent variable - as to be a straight fail.]

But of course the really surprising thing is that Mr Rehn should be writing to Finance Ministers, and the IMF Managing Director, complaining that an academic paper on a very policy-relevant, but highly technical issue of empirical macroeconomics, represented "debate which has not been helpful".  I'm not trying to get on any high horse about academic freedom; it just seems bizarre.  

The optimistic conclusion is that Mr Rehn recognises that the economic justification, tenuous at the best of times, for the self-defeating austerity policies pursued by eurozone policymakers is crumbling - and that, if authored by the IMF Chief Economist, even quite a technical paper (and, who knows, even blogs like mine) can make a major contribution to undermining it and, maybe, lead to pressure for more sensible policies. Let's hope so.