Today In Crazy Statements From European Officials

A blog about business and economics.
April 17 2012 1:23 PM

Today In Crazy Statements From European Officials

There's this:

“I put austerity first,” Alex Stubb, Finland’s EU minister, said. “Only austerity can give back growth.”
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Note that Stubb, while holding a second-tier ministry, is a member of the ruling party and was Foreign Minister in the previous cabinet. He got demoted in order to put together a Grand Coalition that kept the sharply Euroskeptical True Finns party out of government. Point being that this is the governing party's leading spokesman on such matters.

German Finance Minister Wolfgang Schaeuble said Spain was delivering on reforms and the chairman of euro zone finance ministers Jean-Claude Juncker said investors should take note that Spain's fiscal consolidation was impressive.
"I would like to invite financial markets to behave in a rational way," he said. "Spain is on track."

The trouble here is that Schaeuble's model is wrong. He wants it to be true that fiscal austerity + limited reforms lead to greater debt-sustainability and thus lower interest rates. But it isn't true. Forcing sharp fiscal austerity on Spain's already depressed economy does nothing but further worsen the growth outlook. Nothing in these reforms does anything remotely big or fast enough to counteract that. Indeed, from a "structural" point of view I think it's very questionable that altering labor market regulations does enough to counter the negative "structural" impact of prolonged mass unemployment especially among young people. Spain is going to be de-skilling and de-capitalizing at an alarming rate over the next several years.

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