Tuesday, May 08, 2012

Paul Krugman is right: There is a better way and the French & Greeks chose it


Paul Krugman has a reasonable explanation for what is going on in Greece and France where elections have changed the guard a day or so ago.

And his explanation highlights just how out of touch with reality the Harper government is with its own austerity plan, trying through slashing and burning to reduce in a hurry the deficits and debt increases brought about on its watch. A pity that Stephen Harper does not have the economic smarts of Paul Krugman, but dem's the breaks for a country with an archaic electoral system.

Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.

What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper. ..

Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don’t like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe’s crisis countries might be able to emulate Germany’s success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom.

So Germany’s experience isn’t, as the Germans imagine, an argument for unilateral austerity in Southern Europe; it’s an argument for much more expansionary policies elsewhere, and in particular for the European Central Bank to drop its obsession with inflation and focus on growth.

The Germans, needless to say, don’t like this conclusion, nor does the leadership of the central bank. They will cling to their fantasies of prosperity through pain, and will insist that continuing with their failed strategy is the only responsible thing to do. But it seems that they will no longer have unquestioning support from the Élysée Palace. 

And that, believe it or not, means that both the euro and the European project now have a better chance of surviving than they did a few days ago.
Things are much brighter for everyone today than they were a week or so!

3 comments:

  1. Hmmm...I seem to remember spending cuts and downloads to the provinces being the focal point of the Chretien govt, as a matter of fact, read any Lib blog and you'll hear about the "tough cuts" and austerity measures that had to be implimented by Chretien and, how those measures saved Canada's future. So, which is it? There is a simple choice, debt either matters or it doesnt. If it doesnt then I agree with Krugman, if it does then I agree with Chretien and Harper.

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  2. There is a midpoint - what amount of debt and how long to take to reduce excess debt to a more manageable amount.

    Countries in the EU can carry more debt than many rightwing yappers maintain; and excess debt can be reduced over 5 to 10 to 15 years rather than viciously over 2 to 3 years.

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  3. Yes, the thing to do is get rid of "austerity". The question is "how"? Austerity can be a choice or it can be an imposition. If France and Greece decide that spending is the way to go, spending is a deficit manner, then where exactly are they going to borrow that money? And if they can't borrow it because no sane bank, or individual, or nation will loan to them then the only other way to get money is to literally make it. The problem with that, as Weimar Germany, Argentina, Zimbabwe and many more found out is the printing presses can't keep up with the inflation. So, Krugman's a genious? I prefer Hayek. If it takes a great deal of pain to get out of this boom-bust cycle the welfare state has wrought then so be it.

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