Except now it's looking more and more like austerity may be a flop. See, everyone expected that austerity would be an economic drag. What they didn't expect is that austerity would worsen sovereign balance sheets (or at least not improve them).
Of course there were warnings. Ireland was an early austerity adopter and it did squat. Richard Koo has been slamming the austerians, using the Japanese lesson, for some time.
And now we're getting results from the recent wave, and so far they're not that encouraging -- in fact, Moody's is now warning that austerity will make the sovereign credit worse in many situations (though of course they're behind the ball, as bond spreads in Ireland and Greece are now showing).
If these initial results hold, this will definitely pose a policy dilemma. In theory it should cause people to question their previous assumptions, though it's hard to say what will happen. Most likely the pro-austerity camp will simply double down on their calls, claiming governments aren't going far enough.
Wednesday, August 25, 2010
Publicada por Miguel Madeira em 00:15