Earlier this morning we asked what the point of austerity in Europe was, given that it’s not only making the PIIGS economies weaker, it’s not even improving their deficit positions!Paul Krugman riffs on the same topic and concludes with:
Contractionary policies, it turns out, are contractionary. And don’t tell anyone, but this means that Keynesian economics is right.
Here’s what’s right: Keynesian economic tools could have easily told you that austerity would fail to solve Europe’s debt woes. And it’s also a lot more useful than the current conservative economic thinking of “cut spending… job growth!”
Whether that means that in the long term it makes sense to have an economic system where the government is always trying to cancel out booms and busts is a totally different question.
Finally, it’s important to recognise that in the European context, the PIIGS have had no other choice. Stimulus hasn’t been an option for them, because of the bond markets.
In their case, the only real solution is debt repudiation, and quite possibly ultimately leaving the euro.