30th March 2012
I wish today to look at the situation in Greece and to explain that during its current crisis it has a problem which conventional economic theory would have told us was virtually impossible. Indeed such theories are still about for example I quoted in my article on Wednesday this excerpt from a speech by David Miles who is a member of the UK Monetary Policy Committee.
"My view – shared by my colleagues on the MPC – is that there is a margin of spare capacity in the UK economy which has been, and will continue, depressing domestically generated inflation pressures."
If you change the UK for Greece and you pursue such a theory you will project the following. Firstly that there is an extraordinary output gap following the economy's acceleration downwards which in 2011 was of the order of 7% which came on top of a 5% fall in 2010. Accordingly you would conclude that there must be heavy downward pressure on domestically generated inflation. Indeed it would not seem unreasonable to think that we should be seeing not only falls in inflation but outright falls in prices or what I call disinflation.
Reality in Greece is somewhat different from such theories
From her statistics agency yesterday.
"The Producer Price Index in Industry (PPI) in February 2012 compared with February 2011 recorded a rise of 6.8%."
Certainly not what the theory above would make you expect or predict is it. And if we look further into this report we see that such a situation has been persistent over her recent crisis.
"The index in February 2011 had recorded an increase