Posted Thursday, Nov. 15, 2012, at 12:07 PM
The eurozone economy shrunk slightly for the second quarter in a row. In other words, recession conditions.
There's not much new to the situation there, but I do want to once again remind people that it's very misleading to see this problem—contracting output—as having been somehow caused by excessive indebtedness. What happens when there's a lot of debt is that you need to do a lot of debt repayment, you need to boost your income over your level of consumption. What's happening in Europe is that the level of income is falling. And it's falling particularly sharply in the countries that most need more income in order to work off debts.
Some folks on the American right have attempted a semantic reconfiguration of the austerity debate, but this is precisely an instance of self-defeating austerity.
The idea of austerity is that you need to be austere. That as a society you need to squelch consumption (with higher taxes, lower social welfare payments, and lower government salaries) in order to generate the capacity to repay external debts. The fear of self-defeating austerity is that these efforts will actually serve to reduce incomes, which makes debt repayment harder. And that's exactly what we're seeing both in the eurozone writ large and especially in the key countries.