Krugman Wishes He Was Wrong as Euro Sees Austerity Backlash

I told you so

‘Not a Whim’

 “Francois Hollande has read Krugman,” Michel Sapin, one of Hollande’s economic advisers, said in an interview. “His writings show that Hollande’s proposals are not a whim and that this idea that growth is key is spreading.”

To Krugman, advocates of fiscal retrenchment such as German Chancellor Angela Merkel are ideological “austerians” who by misunderstanding the ills they’re trying to cure risk “Europe’s economic suicide.” He calculates that paring government spending by one euro ($1.32) generates only about 40 cents in reduced debt in the short-run and 1.25 euros in lost production.

“Aggressive fiscal austerity is self-defeating if you can’t grow,” said Andrew Balls, the London-based head of European portfolio management at Pacific Investment Management Co., which oversees the world’s largest bond fund. “Krugman is a highly respected economist with a prominent platform who provides a very clear explanation of that view.”

 ‘Genius’ Spokesman

Kevin O’Rourke, who teaches at the University of Oxford, calls Krugman a “genius” who is applying the “very simple” lessons of economics that were patronised as not technical enough by those who argued austerity wouldn’t derail growth.

“He has become the spokesman for all of us who believe that our time in undergraduate lecture halls was not wasted,” said O’Rourke, whose research Krugman has praised on his blog.

Not all buy it, including Germany’s Merkel, who pushed for a fiscal pact to ensure better discipline in the future and which 25 of the European Union’s 27 governments signed up to.

     The skeptics argue Europe’s overly-indebted nations helped trigger the financial crisis and now will only attract investors and restore competitiveness once they have put their fiscal houses in order. Spain now pays almost 6 percent to borrow for 10 years, up from about 4 percent in 2009. Germany pays about 1.6 percent.

 ECB Meeting

Draghi delivered no new monetary or liquidity stimulus after chairing a meeting of the policy-setting Governing Council in Barcelona today. The central bank left its benchmark interest rate at 1 percent.

“We can only win back confidence if we bring down excessive deficits and boost competitiveness,” Bundesbank President Jens Weidmann said April 23.

Columbia University economists Jeffrey Sachs and Edmund Phelps both reject Krugman’s view as a “crude” form of the pump priming proposals of John Maynard Keynes, the 20th century British economist. Federal Reserve Chairman Ben S. Bernanke last week dismissed Krugman’s call for the U.S. central bank to allow much faster inflation as “reckless.”

“I can’t stand this rubbish anymore,” said Norbert Walter, the former chief economist of Deutsche Bank AG who now runs his own consultancy. “If you are in a cul-de-sac the only way out is to go backward. Countries clearly living beyond their means must reverse.”

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