Paul Krugman: Paul De Grauwe and the Rehn of Terror:
Nobody has taught me as much about the euro crisis as Paul De Grauwe… self-fulfilling debt panics in countries that no longer have their own currencies. Now… De Grauwe and Li show is that the rush to austerity in Europe largely reflected the surge in sovereign debt spreads after Greece got in trouble; the bigger the spread, the harsher the austerity. But it turned out that the spreads didn’t reflect underlying fiscal fundamentals… [as shown by] spectacular decline in spreads once the ECB… remov[ed] fears of a self-fulfilling liquidity crisis. Meanwhile, all that austerity has taken a terrible toll….
They also show that countries pursuing austerity have by and large seen their debt positions worsen. But take heart. Olli Rehn of the European Commission, last heard declaring that the big problem with austerity isn’t that it doesn’t work, it’s the fact that economists keep publishing studies showing that it doesn’t work, says that the only thing we have to fear is fear itself:
Mr. Rehn insisted that Europe’s belt-tightening policies were working and would lay the groundwork for a recovery…. “We must stay the course of reform and avoid any loss of momentum, which could undermine the turnaround in confidence that is underway, delaying the needed upswing in growth and job creation,” he said in the statement.
Well, that’s all right, then.