From The New York Times: http://krugman.blogs.nytimes.com/2011/12/14/mario-and-the-confidence-fairy/
December 14, 2011
Oh, my. A downbeat FT report includes the following:
Mario Monti, whose technocratic government took office after Italy’s debt crisis toppled veteran premier Silvio Berlusconi, is seeking to tackle public debt levels which stand at 120 per cent of gross national product but faces resistance from labour unions and political foes.
“We are confident that markets will react positively to the efforts Italy is making, maybe not tomorrow, but the reduction in borrowing costs that we anticipate in the coming months will help spur the economy,” Mr Monti told legislators on Tuesday night.
I guess in Europe today “technocratic” is a synonym for “delusional”.
Look, more austerity isn’t going to convince the bond markets that Italy is just fine, let alone cut interest rates sufficiently to make contractionary policies expansionary. In fact, austerity — at least if not accompanied by major policy changes in Frankfurt — is probably self-defeating, because it will hurt the Italian economy more than it helps the short-term budget picture.
Italy faces an immediate crisis of self-fulfilling panic, and a huge medium-term adjustment problem as it tries to get costs and prices back in line with core Europe. The only plausible way to resolve these problems is via much more liberal policy from the ECB, in the form of bond purchases now and an implicit (but understood) willingness to let inflation run a bit high for an extended period.
The story optimists were telling themselves was that all this austerity stuff was to provide cover for the ECB to do the necessary. But this now looks like wishful thinking; Europe’s delusional technocrats apparently still believe that one more turn of the austerity screw will do the trick.
Continue reading at: http://krugman.blogs.nytimes.com/2011/12/14/mario-and-the-confidence-fairy/