Paul Krugman, Noble Prize winning economist and New York Times columnist, wrote in his column last Sunday about the outcome of two critical European elections, in France and Greece. Krugman, who has been all along an opponent of the European strategy of recovery through austerity sees those elections as a clear repudiation of this strategy and offering an opening to solutions of the Euro crisis. Krugman states:
"What’s wrong with the prescription of spending cuts as the remedy for
Europe’s ills? One answer is that the confidence fairy doesn’t exist —
that is, claims that slashing government spending would somehow
encourage consumers and businesses to spend more have been
overwhelmingly refuted by the experience of the past two years. So
spending cuts in a depressed economy just make the depression deeper. ........Moreover, there seems to be little if any gain in return for the pain."
He then continues on the alternatives: the first would be the break-up of the euro, which in essence he dismisses as being "too disruptive." The other, more credible, alternative in his view would be much more expansionary policies by the European Central Bank in the richer countries, first of all Germany. Krugman believes that the win by French socialist Hollande as new president will make this latter alternative more likely in the months to come. It's true that with Hollande the German-French axis between conservatives Angela Merkel and Nicolas Sarkozy may get looser, but let's see if Krugman will be right that expansionary policies will be the outcome.