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The EU’s Penchant for Punishment Could Cause Good Eggs to Go Bad

The Economist points out that the current policy being pushed on the Eurozone’s weaker periphery states is wrongheaded and particularly dangerous. The main premise?

If Spain and Italy find they can’t escape the crisis by behaving, then they may see if they can’t escape the crisis by misbehaving.

In other words, Spain and Italy are not being given the proper incentives to “behave.”  Spain has stuck to strict austerity programs despite having entered the crisis with a low and falling debt-to-GDP ratio, but the contradictory logic of markets has pushed up bond yields nevertheless. Meanwhile, the ECB sits idly by instead of offering Spain relief as a reward for its painful budget cuts.

Italy is in the same boat, except that it has a more important bond market. The country has lots of debt but has ejected its corrupt, Berlusconi-era administration and brought in magician-reformer Mario Monti to help dissolve the structural impediments standing in the way of Italian growth. Its ongoing reforms notwithstanding, markets have driven up Italian bond yields.

Periphery countries like Italy and Spain no longer have much of an incentive to keep pushing ahead with austerity. If EU policymakers know what is good for them, they will shift their singular focus on punishing bad economic behavior to rewarding genuine efforts at reform.

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  • Andrew Allison

    I think that the problem may be that there’s a misapprehension that austerity can somehow be avoided. One way to look at the situation is that markets are increasingly unwilling to toss money into economic black holes: if a country can’t afford its current debt, lending it more is folly.

  • Jim.

    @1: Agreed.

    The erosion (and now collapse) of these countries’ finances is the direct result of the erosion (to the point of collapse) of Europe’s share of global trade.

    Europeans have to get used to the fact that they no longer have the sort of dominant economy that can support a vigorous Blue social model.

    Printing or borrowing magic money won’t help. They have to rebuild their economic base. That won’t be fast, and things will get worse before they get better.

    The fact that Blue politicians boost the expectations of their populations instead of telling them the hard facts (or trying to change the subject away from economics, which is inevitably going to be bad news) is going to make the readjustment of expectations all that much harder.

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