How to lose the Euro battle

"Imagine an army going to war. It has overwhelming firepower. The generals, however, announce that they actually hate the whole thing and that they will limit the shooting as much as possible. Some of the generals are so upset by the prospect of going to war that they resign from the army. The remaining generals then tell the enemy that the shooting will only be temporary, and that the army will go home as soon as possible. What is the likely outcome of this war? You guessed it. Utter defeat by the enemy."

That's from a recent paper on the European Central Bank by Paul De Grauwe, faculty member at the University of Leuven, former member of the Belgian parliament, and editor of four of our books. The paper takes the Bank to task for the timidity of its bond-buying program, intended to stabilize the European economy. De Grauwe thinks that the ECB's open lack of commitment means that the program will have the opposite of its intended effect, with continued skepticism on the part of investors. The result? "You guessed it. Defeat by the financial markets."

Parts of the paper are somewhat obscure to those who haven't closely followed the Euro's fortunes over the last few months. But I found the last paragraph interesting for what it says about the role of academics vs. politicians in economic forecasting:

Academics have the reputation of living in an ivory tower far away from the realities of the world. My impression is that instead of the academics, it is the European leaders who have been living in an ivory tower. Disconnected from the economic and financial realities, they have created an institution that does not work and will never do so properly. Now they are creating a financial gimmick that, in their fantasies, they expect to solve the funding problems of major Eurozone countries. It is time for the European leaders to step back into the real world.

Read the whole thing here. Paul Krugman of the New York Times comments on De Grauwe's paper here.