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.