You honestly have to feel for Paul Krugman and the handful of others who have been telling us all along that austerity policies are bound to fail:
Europe’s leaders braced their nations for a turbulent year, with their beleaguered economies facing a threat on two fronts: widening deficits that force more borrowing but increasing austerity measures that put growth further out of reach.
Saying that Europe was facing its “harshest test in decades,” Chancellor Angela Merkel of Germany warned on New Year’s Eve that “next year will no doubt be more difficult than 2011” — a marked change in tone from a year ago, when she praised Germans for “mastering the crisis as no other nation.”
Her blunt message was echoed in Italy, France and Greece, the epicenter of the debt crisis, where Prime Minister Lucas Papademos asked for resolve in seeing reforms through, “so that the sacrifices we have made up to now won’t be in vain.”
While the economic picture in the United States has brightened recently with more upbeat employment figures, Europe remains mired in a slump. Most economists are forecasting a recession for 2012, which will heighten the pressure governments and financial institutions across the Continent are seeing.
Adding to the gloomy outlook is the prospect of a downgrade in France’s sterling credit rating, a move that analysts say could happen early in the new year and have wide-ranging consequences on efforts to stabilize Europe’s finances.
Despite criticism from many economists, though, most European governments are sticking to austerity plans, rejecting the Keynesian approach of economic stimulus favored by Washington after the financial crisis in 2008, in a bid to show investors they are serious about fiscal discipline.
This cycle was evident on Friday, when Spain surprised observers by announcing a larger-than-expected budget gap for 2011 even as the new conservative government there laid out plans to increase property and income taxes in 2012.
Indeed, even in the country where the crisis began, Greece, the cycle of spending cuts, tax increases and contraction has not resulted in a course correction, and the same path now lies in store for much larger economies like those of Italy and Spain.
“Every government in Europe with the exception of Germany is bending over backwards to prove to the market that they won’t hesitate to do what it takes,” said Charles Wyplosz, a professor of economics at the Graduate Institute of Geneva. “We’re going straight into a wall with this kind of policy. It’s sheer madness.”
Rather than the austerity measures now being imposed, Mr. Wyplosz said he would like to see governments halt the recent tax increases and spending reductions, and instead cut consumption taxes in a bid to encourage consumer spending. More belt-tightening, he said, increases the likelihood that Europe will see a “lost decade” of economic torpor like Japan faced in the 1990s.
He has to be pulling his hair out.
Davis X. Machina
Priorities of a politician.
Being right, and in the same way and at the same time as everyone else.
Being wrong, but in the same way and at the same time as everyone else.
Being wrong, after everyone else, but in the same way.
Being right, but in a different way as everyone else.
Being right, but before everyone else.
Being right, but before everyone else and in a different way.
If you don’t believe me, ask Howard Dean.
burnspbesq
I have occasionally taken issue with what I perceive to be Krugman’s incomplete understanding of (or refusal to accept the reality of) the political constraints that have kept the Obama Administration from going full metal Kaynesian, but there simply can be no dispute that he’s dead right on the macroeconomics. And his taste in music isn’t bad, either.
Raven
woof
superluminar
“It’s sheer madness”. Yes.
Mino
I make no claims as an economist, but it is possible that many European countries would not find borrowing in large amounts as inexpensive as we have it.
I don’t see how we get out of this spiral without voiding many of those financial instruments of mass distruction. They are serving to inflate the numbers beyond comprehension.
Hill Dweller
@burnspbesq: I’ve really enjoyed watching both Krugman and Ta-Nehisi Coates go through their respective quests for new music. The substantive stuff they publish ain’t bad either.
MBunge
Krugman may have won the Nobel for economics but he still rides the short bus to school when it comes to politics.
Mike
Ken
Is “so that the sacrifices we have made up to now won’t be in vain” the sunk costs fallacy?
cathyx
And for a man his age, he has a pretty full head of hair.
cathyx
It won’t get better until the bankers are no longer in control and they take the beating they rightfully deserve.
Geeno
Paul Krugman is tired of trying to reason with you people
Snarki, child of Loki
Cassandra didn’t have an easy time of it either.
Geeno
crud – trapped in moderation – let’s try this again.
Paul Krugman is tired of trying to reason with you people
Geeno
Oh well – I give up
Moderation has got me and won’t let go.
I’ll bet this ends up in moderation.
Davis X. Machina
@MBunge: Non omnnia omnes possumus.
RalfW
I think we deserve the disaster that lies ahead. Humanity is simply refusing to learn from it’s own history and progress. It’s just insanity.
I’ve been more pessimistic in the past 36 hours than I have been since November 2004.
It’s one thing for the lunatics to be mangling the good ol U S of A. But to hear that they’re fvking over 90% of Europe too makes me think the Mayans may have been much more correct that we thought.
Or, a little more sunnily, this really will be India and China’s century. That don’t seem so bad.
WereBear
@cathyx: Got it in one.
It’s the bankstas ducking responsibility, and losses, that keep us slowly sinking while they rearrange things to suit themselves, yet again.
dmbeaster
The European austerity binge is a deliberate strategy to protect the bad loans made by the lenders. Everyone else suffers, but god forbid the banks should take a haircut for crazy lending. Obviously, bank failures from the bad sovereign debt will also cause hardships, but lets be clear about this. The policy makers are making a very deliberate choice about who is going to be hit in the neck by these difficulties, and the banksters are getting an unmerited pass.
It is amazing to me how in the basic creditor/debtor relationship, the lender who makes a crap loan gets a pass, and its always about the alleged moral failure of the borrower. Yes, many countries took out imprudent debt once they joined the eurozone because they could, but what the hell, a lender who hands out the money imprudently has no inherent right to protection.
The European situation is greatly complicated by all of the impacts of their ongoing experiment in trying to coordinate their economies, fiscal policy and currency. But that is just the process whereby this problem is getting worked out. Its all about imprudent lending of sovereign debt, and the political game about who is going to be left without a chair when the music stops.
burnspbesq
@RalfW:
Speak for yourself with this “deserve” nonsense. No one can rationally say this unless they implicitly assume that the Angel of Death will pass them by because they are pure of heart. The Hobbesian state of nature doesn’t work that way. You’re going down too. So you might want to think about working to avoid it.
wenchacha
Ry Cooder says it all. No Banker Left Behind.
Delia
@RalfW:
Humanity? Maybe the banksters and the politicians they control. That part of humanity. They’ve been at this game for years, but before they were sucking the lifeblood out of places we don’t care so much about, like South America and Africa, most people didn’t pay enough attention. Now they’re working on the center of the known universe, namely us and Europe. So it’s a catastrophe. Of course it really is, even for the bloodsuckers, because they’ve never stopped to consider what happens when the last bastions of wealth have gone dry.
RalfW
@burnspbesq:
Oh, I am working to avoid it. I say it with out relish.
@Delia:
I’m being rather too grandiose in the wake of New Years. But it sure seems like the demos in democracy is being collectively idiotic in multiple countries on more than one continent.
And I actually still believe (foolishly?) enough in democracy to accept that when the people, together, make horrible decisions, we all own the consequences.
“I didn’t vote for him” works in a limited sense, but the shits gonna roll downhill to all of us.
So yes, I’m working to avoid the worst – volunteering, donating, citizen-lobbying, protesting, the whole darn thing.
But it may not work. And I needed to vent that thought. This may not have been the appropriate venue.
Anonne
@MBunge: I think he’s well aware of the limits of politics, but if you don’t start with good policy, what is the point?
Mnemosyne
@dmbeaster:
I, too, could never understand why it was bad for a borrower to lie about his/her income but it was a-okay for the lender to not bother to check the borrower out. When did due diligence get thrown out the window as a business concept?
Ruckus
@Mnemosyne:
When did due diligence get thrown out the window as a business concept?
I know this is a rhetorical question but the answer is when they were able to purchase politics and politicians. At wholesale volume and value.
stevestory
is ralfw the stupidest person to ever comment here, not counting the trolls? or am i missing someone?
AA+ Bonds
As opportunity and income decreases in Europe, and inequality increases, nationalism will rise, and fascism with it – Europe may come to resemble the United States, in other words
AA+ Bonds
@Mnemosyne:
This is because in economic terms, the lender always takes on more risk than the borrower, thus the onus is on the borrower, not saying this is realistic or anything
Commenting at Ballon Juice since 1937
Germany may not look so good in a year, now that its trading partners no longer have access to cheap credit. There’s a reason Germany was an export power house, and a good portion of it was because Greece, Italy, et al were buying their stuff.
Corner Stone
@MBunge:
So let’s see your distinguished CV for politics then.
Chris
@RalfW:
For their sake, I kind of hope the big democracies in the developing world – places like India, Brazil, South Africa – eventually hammer out their own, saner political-economic consensus. Something that avoids both the authoritarian-capitalist model China’s following, and the insane, suicidal Randroid cult that the West’s been in love with since Thatcher/Reagan.
Chris
@AA+ Bonds:
IMO, the big difference between the political spectrum in the United States and in most western European nations is that over there, the far right and the center right are still separate, and competing entities. As opposed to the U.S. where the far right isn’t a loony fringe like the BNP or FN, but has been fused together with the “mainstream” right wing party for as long as I can remember.
We’ll see how much that matters. In France, for example, Sarkozy’s openly said that he intended to “take back” voters from the far right… which sounds a lot like the way Nixon courted Dixiecrats back in the 1960s to me, and isn’t the only way he’s reminded me of Nixon over the past decade.
One thing’s for sure – America got to where it is now because of the way racial and cultural divisions were exploited. With the immigrant populations in Europe and the anti-immigrant backlash from various quarters, anyone who wants to follow down the Goldwater/Nixon/Reagan route has some good material to work with.
Samara Morgan
I think its the end of “freed” market economics.
unless we can get off planet.
priscianusjr
@dmbeaster: Thank you for this. Not only the BEST explanation the persistence of this idiocy — the ONLY explanation I’ve seen. Krugman, Simon Johnson, James Kwak, and umpteen other economists have been talking Keynesianism for years now, but no one seems to explain WHY they’re not being heeded. Maybe because the real explanation falls outside the boundaries of anything that could pass for actual economics.
priscianusjr
@dmbeaster:
El Cid
Supporting an ideology and economic models which serve class warfare needs for a right wing upper class retrenchment is more important than macroeconomic models of “success”.
William Hurley
@burnspbesq:
I must agree with your assessment of Krugman’s economic analyses, but I cannot do so with regard to your assessment of his read on the political dynamics.
Back in late ’08 and early ’09, the period roughly corresponding to the Lehman/TARP causal pairing to the making law of the ARRA, Krugman very regularly implored Obama and the Clinton retro-fitted economists of his CEA to propose the largest sum possible for the ARRA because he would not get a 2nd chance. By 2nd chance, I mean to characterize Krugman’s many caveats regarding a “booster” (my word) or add-on to the original ARRA or a wholly new second stimulus package. History has proven Krugman’s warnings correct, if not prescient.
One of the more confounding elements of the political dynamics of the stimulus package, from structuring and proposing to lobbying and whipping votes, is that Obama pronounced a too small sum that was far too heavily dependent on “low multiplier” tax cuts – the latter setting a precedent that the President would make habit. In short, even before an actual proposal was put before Congress – a Congress composed of a Democratic majority in the House and a Democratic majority in the Senate – the President decided to “stake out” the smallest, most parsimonious turf upon which to wage “war” over restarting the economy.
As predicted by Krugman and many others, Obama “won” the battle only to lose the war.
Of course, any discussion of Obama’s economically disastrous policies is incomplete without mention of his abject failure – a neglect that begs criminal inquiry – to adequately acknowledge let alone address the housing debacle which is merely one-side of the coin to the “blameless” pillaging of America by Obama’s most reliable and generous donors – and formerly employers of his Chief of Staff – the Wall St banksters.
The collapse of the housing market and concomitant, non-stop deflation of home values has robbed tens of millions of Americans of an aggregate sum no less than $14 trillion. I guess Obama’s OK with that as long as he gets the billion or so dollars he and Plouffe believe he needs to remain competitive into November. Still, I’d put my money on 2013 being the year that Chicago is rewarded with the establishment of a new law firm with prestigious partners known as Obama & Obama, LLP.