CNN.com (2/26/13) had an odd piece of analysis of the Italian election results from Barbie Latza Nadeau, Newsweek‘s Rome bureau chief:
Newsweek‘s Barbie Nadeau, advocate of austerity.
Italy has actually used up many of its final chances in this electoral season…. The country [has] chosen not to embrace continuing austerity under technocratic leader Mario Monti, which is necessary by any calculation to actually start moving Italy out of the recession.
Really? That’s not the calculation of Paul Krugman (New York Times, 2/25/13), who for what its worth is a Nobel Prize–winning economist:
Mr. Monti was, in effect, the proconsul installed by Germany to enforce fiscal austerity on an already ailing economy; willingness to pursue austerity without limit is what defines respectability in European policy circles. This would be fine if austerity policies actually worked—but they don’t….
When Europe began its infatuation with austerity, top officials dismissed concerns that slashing spending and raising taxes in depressed economies might deepen their depressions. On the contrary, they insisted, such policies would actually boost economies by inspiring confidence.
But the confidence fairy was a no-show. Nations imposing harsh austerity suffered deep economic downturns; the harsher the austerity, the deeper the downturn. Indeed, this relationship has been so strong that the International Monetary Fund, in a striking mea culpa, admitted that it had underestimated the damage austerity would inflict.
Meanwhile, austerity hasn’t even achieved the minimal goal of reducing debt burdens. Instead, countries pursuing harsh austerity have seen the ratio of debt to G.D.P. rise, because the shrinkage in their economies has outpaced any reduction in the rate of borrowing. And because austerity policies haven’t been offset by expansionary policies elsewhere, the European economy as a whole—which never had much of a recovery from the slump of 2008–09—is back in recession, with unemployment marching ever higher.
Krugman is hardly the only economist who calculates that austerity hurts Italy’s efforts to recover from the recession rather than aiding it. Here’s Dean Baker’s headline from 2011 (9/21/11), shortly before Monti took office: “Tax Increases and Spending Cuts in Italy Will Slow Growth, Not Speed It Up.” Sure enough, Italy’s GDP growth was 1.8 percent in 2010, 0.4 percent in 2011 and -2.3 percent in 2012.
But despite all evidence, most corporate media pundits remain convinced that not only is austerity the best policy—it’s the only possible policy. As Krugman writes: “Far from seeming either mature or realistic, the advocates of austerity are sounding increasingly petulant and delusional.”
Thanks to Sean Cox of Fordham University for pointing this quote out to me.
I do not know if Italy can afford expansion and austerity may be their only option. Their credit rating has been cut to BBB+ which is close to junk status. If the wanted to finance expansion they would need to borrow at high interest rates. Cutting spending may be their only option.
Austerity is always the ‘only option’ for the people, because the leaders otherwise would have to give up their overstuffed bank accounts and the billions they have stolen. It is not Austerity when the leaders steal the whole pie and then pretend there is no more for anyone else.
MIrza: cutting spending is the only option? If you’re feeling hot, just put on more clothes? What kind of strategy is that? The problem is in Brussels, not in Rome. The banking system should be pouring out euros for infrastructure improvement, bailing out stressed education systems, and helping member governments to finance public jobs programs. As Krugman says, why continue failed economic policy?
Krugman may be a Nobel winner, but he is not above dogma and hysteria. Consider what he wrote in May 2012:
http://krugman.blogs.nytimes.com/2012/05/13/eurodammerung-2/
Greece did not exit the Euro. There were no bank runs in Spain and Italy. No “huge draws on ECB credit” so far. No “End of the Euro” in sight still. And the comment about “petulant and delusional” could easily be applied to Krugman himself :-(
Makes one wonder how he managed to get the Nobel prize.
I do not mean that Italy must follow austerity no matter what. Italy runs a budge surplus so most of the debt is inherited. Any analysis of Italy must take this into consideration. Both Krugman and US corporate media pundits are getting it wrong with their shallow dogmatic reasoning.
Richard: How can Italy spend the money that they do not have? Right now interest on their debt is 5% and that is only because there is an implicit guarantee from EU and germany which is conditional on austerity. Even if Italy were to borrow as much as they wanted at 5% there is no way that they can grow faster than 5% interest rate which means that their debts will grow faster than their economy.
The gamblers lost at the roulette table so they’re shaking down the casino.
Mr. Kumar, Some say ‘the euro’ is the problem. The people running the euro zone are primarily bankers with a too much power over member states and often denying soverign determination. Berlusconi (though an insect) was basically forced to resign by the World Bank and IMF. In some circles this would be known as a coup. Why shouldn’t Italy make economic decisions based upon the merits of it’s own unique calculus? Having so many countries under the same monetary system has potential to devolve into economic and social cataclysm. Mr. Krugman is “spot on”. Besides – when has removal of money from an economy ever strengthened one? ESPECIALLY DURING A DOWN ECONOMY. The notion is absurd. It is the job of the government to prime the gears of commerce. Then, when business is hiring – people are spending you start to trim.
There are a lot of flaws in your analysis of the European economic situation, not the least of which is your reliance on Krugman and his so-called Nobel Prize (there is no Nobel Peize for economics – about 70 years after the Nobel Foundation was created, a bank decided to establish a prize for economics “in his name”). While a great many economist consider work undeserving of the prize, I find that not nearly as relevant as the fact that his very narrow academic work (for which he recieve a prize) does not really make him particualrly qualified to comment on the issues that he primarily rants about in his columns. Granted, anyone can write a column about anything but this assumption of expertise in his case is unfounded. It would be akin to having a metallurgist write a column on the auto industry – yes, he knows quite a bit about some elements that become components of a vehicle but he is not as qualified as someone with more practical experience.
Your second mistake is one you share with Krugman, which is a gross misunderstanding of what these so called austerity measure actually are. You will find it is hard to get cleary stated numbers on the various programs enacted by the Eurozone nations but when you dig into them, they are usually driven by tax increases – 75-90% of the total projected reductions in deficits are based on revenues rather than spending cuts. Any damn fool can tell you that tax increases are a bad idea in a weak economy and anyone who says that spending cuts have even been serious tried in the Eurozone are just not looking at the numbers.