Krugman Wishes He Was Wrong as Euro Sees Austerity Backlash

[MachineGhost]

Leading demands for a revised strategy, French Socialist Francois Hollande, a reader of Krugman, tops President Nicolas Sarkozy in the polls with the warning that putting debt-cutting over expansion is “bringing desperation to people.”? Elsewhere, Greeks are turning to anti-austerity parties, recession-wracked Spain and Italy are relaxing deficit targets, the Dutch government is splintering and European Central Bank President Mario Draghi is calling for a “growth compact.”?

Full Story: http://www.futuresmag.com/2012/05/03/kr ... -austerity

[Gosso]

Leading demands for a revised strategy, French Socialist Francois Hollande, a reader of Krugman, tops President Nicolas Sarkozy in the polls with the warning that putting debt-cutting over expansion is “bringing desperation to people.”? Elsewhere, Greeks are turning to anti-austerity parties, recession-wracked Spain and Italy are relaxing deficit targets, the Dutch government is splintering and European Central Bank President Mario Draghi is calling for a “growth compact.”?

Full Story: http://www.futuresmag.com/2012/05/03/kr ... -austerity

Good article.  It does seem completely insane that the way to reduce the deficit is to stop people from working, as Germany seems to be suggesting.  This can easily lead to another Great Depression if Germany has their way.

I liked this section of the article:

Krugman, who won the Nobel Prize in 2008 for his research on trade, argues the birth of the euro in 1999 led to a boom in money flowing into peripheral nations like Spain and Portugal as investors bet their debt was now as safe as Germany’s. Nations prospered with property often leading the way.

When the lending dried up amid the global credit crunch, the economic-tailspin and need to rescue banks propelled budgets and current accounts into the red. That shows to Krugman that, with the exception of Greece, the causes of Europe’s woes are private debts rather than fiscal irresponsibility.

  Spanish Debt

Spain’s government, for example, ran a debt of 36 percent of gross domestic product in 2007 and Ireland’s was 25 percent. By comparison, Germany’s was 65 percent at the time. While Italy’s debt was 103 percent of GDP in 2007 its budget deficit was 1.6 percent and Ireland’s account was in balance. Take Greece, Ireland, Italy, Portugal and Spain as a group and its debt was declining into 2007, Krugman estimates.

That suggests public budget cuts are only intensifying the pain caused by a reduction of private investment and spending, according to Krugman. Deprived of their own currency or central bank to help lessen the pain through devaluation or printing money, countries are left trying to deflate their economies to regain competitiveness.

That leaves the likes of Spain now needing outside help, he says. In his view, the ECB could cut interest rates to encourage inflation and stand by to purchase more government bonds. Healthier nations with stronger budgets and trade positions such as Germany should stimulate their economies to increase demand and relative prices.

It appears the Euro problem is not from the reckless government spending, but rather people reaching for yield and assuming the ECB would bail them out if anything went wrong.  Maybe we should blame the evil speculators, and let them go bankrupt.  Once this happens then investors will think twice about buying those higher yielding government bonds.

[MachineGhost]

It appears the Euro problem is not from the reckless government spending, but rather people reaching for yield and assuming the ECB would bail them out if anything went wrong.  Maybe we should blame the evil speculators, and let them go bankrupt.  Once this happens then investors will think twice about buying those higher yielding government bonds.

That is what should happen, but too many -- if not all -- of those "evil speculators" are the banks containing the rank-and-file citizen's deposits.  For some conspiratorical reason, government has abanonded the principles of conservatorship/receivership and instead is bailing out the bondholders of said banks instead of the depositors.

MG