Still Fiscalizing

This from Dr. Krugman's blog. Please follow link to original.
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Still Fiscalizing

Busy day, probably no posting until much later. But I thought I should react to yesterday’s Martin Wolf column, and more generally to the euro situation.

Markets have been relatively hopeful this week, basically because they now believe that the ECB will step in with massive bond purchases — as it should. And I hate to think about what might happen if tomorrow’s summit casts doubt on that belief.

But as Martin says, breaking the self-fulfilling panic is just step one. What the eurozone needs is a credible macro adjustment plan. And that still seems nowhere in sight, largely because Germany is still determined to see the whole thing as the price of fiscal irresponsibility. This is obviously wrong to anyone who has looked at the facts; but as Martin says (while laying out those facts),

The German faith is that fiscal malfeasance is the origin of the crisis. It has good reason to believe this. If it accepted the truth, it would have to admit that it played a large part in the unhappy outcome.

The result of this fiscal fixation is that the macro policies now on tap consist of even harsher fiscal austerity in southern Europe, offset by … nothing. That’s a recipe for a sustained slump that will end up defeating all efforts to resolve the crisis.

And expected inflation for the eurozone is still far too low, indicating an impossible adjustment process for overvalued nations.