The emphasis on fiscal austerity – clearly correct for over-indebted sovereigns – would, cumulated across Europe, weigh too heavily on growth in the absence of any other demand stimulus and an exuberantly strong currency. Germany has stood out for its strong growth in the midst of stagnation by its neighbours, but its longer-term interests cannot be served by endless stagnation in the euro area.
John used 2 percent as a rough guess as to the real federal funds rate that would be consistent with the economy producing at its potential.