Man I am just really down lately, because the great experiment in European austerity has proven to be a disaster for “my side” of the debate. You had all these austerians predicting that the way to reassure bond markets and get yields down on fiscally suspect European nations was to make bold promises about reform. But it’s not like this “unprecedented experiment in austerity” produced something that could be described as “The Italian Miracle,” right? It’s not like Krugman would write a blog post like this:
Italy is a mess. Yes, it has a prime minster, finally; but the chances of serious economic reform are minimal, the willingness to persist in ever-harsher austerity — which the Rehns of this world tell us is essential — is evaporating. It’s all bad. But a funny thing is happening:
What’s going on here? I think that we’re seeing strong evidence for the De Grauwe view that soaring rates in the European periphery had relatively little to do with solvency concerns, and were instead a case of market panic made possible by the fact that countries that joined the euro no longer had a lender of last resort, and were subject to potential liquidity crises.
What’s happened now is that the ECB sounds increasingly willing to act as the necessary lender, and that in general the softening of austerity rhetoric makes it seem less likely that Italy will be forced into default by sheer shortage of cash. Hence, falling yields and much-reduced pressure.
So here’s how you deal with data if you’re Paul Krugman:
(A) Describe what Europe is doing as the dream plan of right-wingers, even though I can’t think of any Austrian or Chicago School guy saying that raising tax rates was a good idea for Europe.
(B) Find any example of bad economic news in Europe, and blame it on “unprecedented austerity.”
(C) Find any example of good economic news in Europe–even falling bond yields, which is exactly what the politicians claimed would happen if they implemented their “austerity”–and attribute it to the ECB doing just enough to offset the horrible fiscal policy.
(D) Then, just for kicks, claim that only a liar or a fool could possibly ignore the mountains of empirical evidence that the Keynesians have been totally vindicated by events in Europe.