Saturday, January 14, 2012

Krugman: Even S&P Recognizes the Folly of Austerity

In my previous post, I noted that Europe might muddle through with a policy predicated on austerity, which is not first-best or even second-best. Apparently S&P recognizes this, as Paul Krugman points out:

We (S&P) 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.


A day before S&P downgraded France, Spain, and Italy, I said that the euro crisis was easing. Did I make a fool of myself? I don't think so. The relatively successful Spanish and Italian bond auctions were encouraging (although Trisha Craig isn't so sure about the Italian case). French bonds have been trading at a premium for months, so the markets had already priced the downgrade in (mostly: French 10-yrs rose 10 basis points, from 3 to 3.1%, on the news). "Bad news but not a catastrophe," as François Baroin said in his characteristically subdued and mellifluous tone. (Is he as bored with the role of finance minister as he often appears to be? Or perhaps on tranquillizers? But I digress.)

Meanwhile, the Greek situation has worsened, and default seems almost inevitable. But Greece has been in de facto default for more than a year.

The big question now is how deep a recession will result from the austerity imposed by the ECB as the condition of its three-year repo promise--call it a bailout, quantitative easing, emergency rescue, whatever: the result is the same, namely, investors are now willing to hold the debt of troubled countries like Italy, Spain ... and, to an even greater extent, France, since there is an implicit ECB guarantee. This means that Europe might be able to muddle through, but only if the politics of austerity don't blow up in one of these countries, leading to a rejection of the euro deal or perhaps the EU altogether. It will be a close-run thing.

Does this mean that I've abandoned Paul Krugman in his tireless campaign against the Very Serious People who insist that the imposition of pain is the only way out of any crisis? No. I think we are far from adopting a first-best policy in Europe, but first-best seems out of the question, and second-best as well, barring a massive change of hearts and minds in Germany primarily but elsewhere as well. So let us hope that third-best will be good enough. As Mrs. Thatcher used to say, "There is no alternative."

Additional comment here.

Mélenchon-Joly: A New Axis?

It seems that Eva Joly and Jean-Luc Mélenchon have been hanging out together quite a lot. Does it mean anything? Maybe. Joly has proven to be more of an anti-Establishment candidate than many Greens had bargained on, which makes her a natural companion to Mélenchon.Both delight in pointing out the contradictions and evasions in the positions of the leading candidates. Both stand on principle, to the point, at times, of rigidity. Their electorates are very different, but in both there are many voters who bitterly reject "the system" and envision progress mainly in terms of replacing it with something different.

What that something might be is no doubt different for the two parties and the two candidates, but there is a certain affinity born of what I am tempted to call not utopianism but rejectionism. Mélenchon said it best: "Qu'ils s'en aillent tous!" He wants "them all" out of office; Joly, the former judge, still sounds as though she hopes to put "them all" behind bars. But on the principle that France would best be rid of the all lot, they agree. That's something.

Investigation Into Bruni's Philanthropy Continues

First Frédéric Martel for Marianne, then Médiapart: the investigation into Carla Bruni's philanthropic activities continues.