I’ve been browsing through the collected speeches of Olli Rehn, the vice-president of the European Commission, who has emerged as the face of denialism when it comes to the effects of austerity. What I wanted to do is pinpoint what, exactly, he and those who share his position see as the evidence that their view is right. And I think it’s two things.
First, they look at the decline in interest spreads against Germany for troubled countries:
I see these moves as indicators of the effects of ECB policies — the LTRO program at the end of 2011, and the signaled willingness to buy sovereign debt beginning last summer. But they see it as proof that the confidence fairy has arrived.
Second, they see adjustment in unit labor costs:
I see that too — but it looks as if only a fraction of the needed adjustment has taken place, with years to go.
So basically they have seized on the ECB’s success at stabilizing debt markets — which from the De Grauwe point of view, which I share, is a demonstration that extreme austerity was unnecessary and unwise — as a vindication of austerity; and they have taken the slow progress of grinding deflation as a sign that all will be well.
Oh, by the way — for those following it, De Grauwe got his austerity measures here.