Time for another post that most of my readers will hate! Paul Krugman, on the recent S & P devaluation of European countries, quotes the agency's FAQ:
We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.
Needless to say, Merkel continues to flog more austerity as the solution, even as she warns her country that it will face "difficult times" (g) in 2012. Difficult times caused, in no small part, because of her policies.
This is a pretty remarkable moment in European history: major European players are betting the future of millions of Europeans on the existence of the confidence fairy and expansionary austerity, despite the evidence that they don't exist:
One lesson that the world has learned since the financial crisis of 2008 is that a contractionary fiscal policy means what it says: contraction. Since 2010, a Europe-wide experiment has conclusively falsified the idea that fiscal contractions are expansionary. August 2011 saw the largest monthly decrease in eurozone industrial production since September 2009, German exports fell sharply in October, and now-casting.com is predicting declines in eurozone GDP for late 2011 and early 2012.
Europe's mainstream leaders are plunging millions of citizens into a severe, and largely avoidable, depression, based on a theory of fiscal policy that is already, visibly failing. And the debate about this policy failure, unfolding even as we speak, is filled with silly distractions. Instead of soberly posing the simple, empirical question whether the current policy is actually working, most German politicians* are instead:
- reciting the cherished, comforting morality tale of the the Thrifty Teuton v. the Profligate Southerner (Europe's speaking German! (g))
- shooting the messenger by criticizing the ratings agencies (g) -- even though, as the muted market reaction to the downgrade shows, the agencies were simply confirming what every sophisticated observer already knew
- Questioning the motives of the people who are questioning their policies (Socialists! Anglo-Saxons!** Slavish votaries of that Svengali Keynes!)
Overall, the debate reminds me of the American debate on the Iraq war in, say, 2005: even as things were going obviously pear-shaped, the war's most stalwart defenders resorted to basically the same kinds of distractions: shooting the messenger, impugning opponents' motives, etc. Just as in 2005, Europe looked on half in horror and half in bemusement as American shot itself in the foot over and over, the same thing is happening in reverse now -- but it's Europe doing the shooting.
** Note that opponents of more austerity are somehow both Socialists and Anglo-Saxons, although usually Anglo-Saxons are dismissed by Europeans for advocating too little government spending (undermining our Cherished Social Protections™), rather than too much. Conflicting political cultures make for strange bedfellows...