European Doom Loop: Dean [Baker] is completely right about the macro doom loop the Europeans have created for themselves, in which the ECB’s refusal to provide either the lender of last resort facility or the monetary expansion the eurozone needs is creating a vicious circle of self-reinforcing austerity. Dick Baldwin got at this very well last week, although he was excessively optimistic about how long the fix would last; it was two days, not six months. And was anyone else struck by Sarkozy’s declaration last week that since French growth was going to be slower than expected, it would be necessary to tighten the budget further? France may still have a AAA rating, but at the margin it’s behaving like a debt crisis country, with fiscal policy reinforcing a downturn rather than fighting it.
I’d still like to imagine that next week Mario Draghi, newly installed as ECB president, will suddenly reveal himself as a supporter of quantitative easing and a 4 percent inflation target, not to mention open-ended lending to crisis countries. And all this would be perfectly sensible — much more so than the way the ECB is actually behaving. But it’s not going to happen.