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In the FT, Wolfgang Münchau nails it re the story du jour: Spain…News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism.
This is probably one of the best paragraphs written about the European crisis yet.
Austerity is an economy killer, and you don’t want to lend to the governments of dying economies.
This of course jibes nicely with Paul Krugman’s characterization of what’s going on in Spain/Europe, which is economic suicide.
The ECB and the Germans are still convinced after all this time that what’s needed is credibility and confidence.
And so they’re stunned when in the days following harsh austerity measures in Spain, yields magically shoot up, not down.
Since the crisis began, there are no examples of markets reacting positively to austerity. The only time markets have been sated is when the ECB takes steps to backstop debt, or the whole of Europe seems to move in the direction of a fiscal union.
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