Afternoon Must-Read: Paul Krugman: Contractionary Policies Are Contractionary
…The ill-considered sales tax hike of the spring is still doing major damage…. So contractionary policy is contractionary. I could have told you that, and in fact have told you that again and again. But some people still don’t get the message. In Germany, the Bundesbank president opposes expansionary monetary policy because it might reduce the pressure for fiscal austerity: ‘Such purchases might create new incentives to run up debt, besides adding to the reform fatigue in a number of countries’….
That’s actually quite an awesome concern to express at this moment. European recovery has stalled, largely thanks to fiscal contraction; inflation is far below target, and outright deflation looms; and the political basis for the European project is coming apart at the seams. And Weidmann worries that monetary expansion might make life too easy for debtors. But as Wolfgang Munchau says in a terrific column today, ‘German economists roughly fall into two groups: those that have not read Keynes, and those that have not understood Keynes’….
How does this end? We have to keep pounding on the issues, and I’m reasonably sure that Draghi and co get it. But with the largest player on the European scene living in a fantasy world, the best guess has to be that nothing much is done until there is complete political crisis, with anti-European nationalists taking over one or more major nations.