Weekend Economists Ring in the Old, Wring Out the New: Dec. 30, 2011 to Jan. 2, 2012

[Demeter]

119. Europe's Austerity Measures May Guarantee Recession by: Paul Krugman

http://www.truth-out.org/europes-austerity-measures-may-guarantee-recession/1324573439

European leaders earlier this month announced a plan that, on the face of it, was pure nonsense...Faced with a crisis that is mainly about the balance of payments,with fiscal crisis as a secondary consequence, they supposedly committed everyone to severe fiscal austerity, which would guarantee a recession while leaving the real problem unaddressed.

But all this was supposed to work, according to many observers — and, briefly, the market — because the pain would provide the cover the European Central Bank needed to step in and buy lots of Italian and Spanish bonds. In effect, the plan is supposed to rely on a Draghi ex machina, which turns contractionary policies expansionary.

It’s actually quite remarkable how many sensible people base their analyses on the presumption that the E.C.B. will do what has to be done. Barry Eichengreen, the economist who is a genuine expert on all things euro, starts his analysis of prospects for 2012 with the confident assertion that Mario Draghi, the president of the E.C.B., will ride to the rescue. “The collapse of the euro zone would, of course, be an economic and financial calamity,” Mr. Eichengreen wrote in a recent column for Project Syndicate. “But that is precisely why the European Central Bank will overcome its reluctance and intervene in the Italian and Spanish bond markets, and why the Italian and Spanish governments will, in the end, use that breathing space to complete the reforms that the E.C.B. requires as a quid pro quo.”

But as far as anyone can tell, the monetary cavalry aren’t coming. And the bond market has figured this out.

What Anglo-Saxon economists need to understand is that the Germans and the E.C.B. really, really don’t share our worldview; they really do believe that austerity is all you need. And all indications are that they will cling to that belief, even as the euro falls apart — an event they will insist was caused by debtors’ fecklessness.

Given a choice between saving Europe and remaining righteous, they’ll choose the latter.

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