The French are revolting. The Greeks, too. And it's about time. Both countries held elections Sunday that were in effect referendums on the current European economic strategy, and in both countries voters turned two thumbs down. It's far from clear how soon the votes will lead to changes in actual policy, but time is clearly running out for the strategy of recovery through austerity — and that's a good thing.
What is true is that Mr. Hollande's victory means the end of "Merkozy," the Franco-German axis that has enforced the austerity regime of the past two years. This would be a "dangerous" development if that strategy were working, or even had a reasonable chance of working. But it isn't and doesn't; it's time to move on. Europe's voters, it turns out, are wiser than the Continent's best and brightest.
So after decades of borrowing from their children and grand children to live the life of Riley, where over 50% of the voters population is on the dole, the French and Greeks try austerity for two whole years without results. Golly, those wise voters sure know what they are doing - oddly enough they are doing what capitalist do - act in their own best self-interest!
But wait - Pauly gives us proof that austerity measures are bunk. Just look at Ireland:
Moreover, there seems to be little if any gain in return for the pain. Consider the case of Ireland, which has been a good soldier in this crisis, imposing ever-harsher austerity in an attempt to win back the favor of the bond markets. According to the prevailing orthodoxy, this should work. In fact, the will to believe is so strong that members of Europe's policy elite keep proclaiming that Irish austerity has indeed worked, that the Irish economy has begun to recover.
But it hasn't. And although you'd never know it from much of the press coverage, Irish borrowing costs remain much higher than those of Spain or Italy, let alone Germany. So what are the alternatives?
After three years of recession, Ireland's economy is recovering, albeit slowly. Led by a pickup in exports, the country saw growth turn positive in the first half of 2011. Financial markets are drawing confidence from Ireland's strong implementation of the European Union (EU)- and IMF-supported program and the signs of recovery.
As a result, Irish bond spreads have fallen markedly since they spiked in July 2011, and are now closer to the levels seen for Italy and Spain than for Portugal or Greece
But the crisis is not yet over, not least because unemployment remains unacceptably high at more than 14 percent. The economic slowdown in other eurozone countries makes it more difficult for Ireland to fully recover from its housing bust in 2008.
So while Krugman would have you believe the Irish slow recovery is due to their austerity measures exclusively, it appears that the real culprit is in large part from the fact that they have no one to trade with in the eurozone because those knuckle heads are depressing the entire region.
Krugman goes on to explain that inflation is the key to the recovery citing Germany in the late 90s as the poster child but with a caveat:
Talk to German opinion leaders about the euro crisis, and they like to point out that their own economy was in the doldrums in the early years of the last decade but managed to recover. What they don't like to acknowledge is that this recovery was driven by the emergence of a huge German trade surplus vis-à-vis other European countries — in particular, vis-à-vis the nations now in crisis — which were booming, and experiencing above-normal inflation, thanks to low interest rates. Europe's crisis countries might be able to emulate Germany's success if they faced a comparably favorable environment — that is, if this time it was the rest of Europe, especially Germany, that was experiencing a bit of an inflationary boom.
Uggg. Paul's answer is to print money I guess so that everyone is in the same sinking ship.
The reason Germany experienced such a quick and decisive recovery is because they freak'n worked their tails off while the rest of Europe reaped the benefits. The Germans cut red tape and created a much more business friendly environment without raising taxes. Meanwhile countries like Greece, Portugal, Spain, Italy and France that were creating more red tape and another generation of welfare recipients
Krugman is giddy because in his view austerity measures have failed after only two years of half-hearted implementation. This would be laughable if it weren't so serious for both Europe and The US.
Exit question: how long will the average German keep working to support the rest of the continent before they get fed up and tell them all to Geh zur Hölle?