No Draghi Ex Machina, by Paul Krugman, in NY Times: So last week European leaders announced a plan that, on the face of it, was pure nonsense. Faced with a crisis that is mainly about the balance of payments, with fiscal crisis as a secondary consequence, they supposedly committed everyone to severe fiscal austerity, which would guarantee a recession while leaving the real problem unaddressed.
But all this was supposed to work, according to many observers — and, briefly, the market — because the pain would provide the cover the ECB needed to step in and buy lots of Italian and Spanish bonds. In effect, the plan is supposed to rely on a Draghi ex machina, which turns contractionary policies expansionary.
It’s actually quite remarkable how many sensible people base their analyses on the presumption that the ECB will do what has to be done. Barry Eichengreen, who is a genuine expert on all things euro, starts his analysis of prospects for 2012 with the confident assertion that Draghi will ride to the rescue.
But as far as anyone can tell, the monetary cavalry aren’t coming. And the bond market has figured this out.
What Anglo-Saxon economists need to understand is that the Germans and the ECB really, really don’t share our worldview; they really do believe that austerity is all you need. And all indications are that they will cling to that belief, even as the euro falls apart — an event they will insist was caused by the fecklessness of the debtors. Given a choice between saving Europe and remaining righteous, they’ll choose the latter.