Brad DeLong: Wolfgang Munchau: Austerity Does Not Create But Destroys Bond Market Confidence
Do the arithmetic. Wolfgang Munchau: >Spain has accepted mission impossible: Are the markets panicking because Spain may fail to hit its deficit targets, or are they panicking at the thought that Spain may succeed?… News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism. >The orthodox view, held in Berlin, Brussels and in most national capitals (including, unfortunately, Madrid), is that you can never have too much austerity. Credibility is what matters. When you miss the target, you must overcompensate to hit it next time. The target is the goal – the only goal. This view does not square with the experience of the eurozone crisis, notably in Greece. It does not square with what we know from economic theory, or from economic history. And it does not square with the simple though unscientific observation that the periodic episodes of market panic about Spain have always tended to follow an austerity announcement…. >European policy makers have a tendency...
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