Via Brad DeLong, signs that European officials are beginning to spot the problem with the "beatings will continue until morale improves" policy:
Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.
A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral…. [L]eaders will discuss long-term structural reforms and better use of E.U. subsidies, while avoiding mention of the one thing that could change the climate: a fiscal stimulus from Germany, the euro currency zone’s undisputed powerhouse….
...Other analysts concur…. “Even countries with relatively strong public finances such as Germany — the country’s budget deficit fell to just 1 percent of GDP in 2011 — are tightening fiscal policy,” Simon Tilford, the chief economist for the Center for European Reform in London, wrote recently. “In so doing, European governments are standing conventional macroeconomic thinking on its head. Governments are withdrawing demand from their economies at a time of pronounced private sector weakness.” Output in both the euro zone and the European Union is still around 2 percent lower than before the crisis. The Spanish and British economies are still almost 4 percent short of their pre-crisis peaks, the Italian one nearly 5 percent, and the Greek and Irish economies 10 percent to 15 percent, Mr. Tilford added….
Germans increasingly accept that this is a dangerous outlook, said Joachim Fritz-Vannahme, director of the Europe program at the research institute Bertelsmann Stiftung. “Many people now say that it will never work to push all the Southern European countries into austerity, hoping that, one day, they will pay back what they owe,”’ he said. In Germany, the opposition Social Democrats have been calling for a new Marshall Plan for Europe…
On a related note, from the Spiegel:
Europe is pursuing a Greece strategy of pressing on regardless of the potential cost. Meanwhile, it is becoming increasingly obvious that this method is not helping the country's economy get back on its feet. Although the Athens government is spending €20 billion less this year than it did in 2009, the debt ratio is still climbing, because the Greek economy will shrink for the fifth year in a row in 2012. And almost all experts agree that the country will not be able to pull itself out of the crisis on its own.
[E]conomists recommend finally doing what is already unavoidable: sending the country into an orderly insolvency. Greece's government creditors, which include the ECB and, most of all, the partner countries that have lent the country money until now, would have to abandon about half of their claims so that the country's mountain of debt could be reduced to a tolerable level. Then the measures that can return the Greek economy to growth on its own can become more effective: reforms in the labor market, more competition in the service industries and foreign investment.
The majority of European politicians still refuse to recognize reality, though. This is understandable, given that abandoning portions of their claims against Greece would translate into substantial losses. But some government representatives are at least willing to approach the first warm-up exercises. When Luxembourg Prime Minister Jean-Claude Juncker was asked by German financial newspaper Handelsblatt last Friday whether the euro countries should also forgive Greek debts, he replied that such proposed solutions are "not entirely absurd."