Austerityprosperity

The first things I read in the morning are still the same things in my head just now. And these are:

Wolfgang Munchau's brilliant piece on how "austerity" and "reform" are often muddled, intermingled and horribly confused in the name of propaganda. Personally, I'm not a fan. Reform might be the most over-used, and seldom understood word in this lexicon. You hear it all the time in India, all across the EU - why even that Nobel winner Palin threw it around on her campaign trail like it was just another caribou. 

The point being...(and this is the most important part of the article) ...that 

"Austerity and reform are the opposite of each other. If you are serious about structural reform, it will cost you upfront money. If you want to open your labor market to a hire-and-fire rule, you will need policies to deal with those who are laid off. These costs may outweigh the financial benefits of reforms in the short term but the reforms may still pay off in the long run. Structural reforms, properly done, are not suited to the task of delivering austerity.

By contrast, austerity – higher taxes and cuts in public sector investments – weaken the economy’s capacity in the short run, and possibly also in the long run. If you have youth unemployment of more than 50 per cent for a sustained period, as is now the case in Greece, Italy and Spain, many of those people will never find good jobs in their lives. Economists speak of a so-called “hysteresis” effect – permanent economic damage that will not be repaired even if there is a full recovery. Austerity could well leave an economic and social scar across the Eurozone."

I've often found this last paragraph chilling.

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Wolf's piece was on the UK's rating downgrade. Namely that this has happened because of the austerity drive and not in spite of it. 

I don't think this surprised anyone and I'm also the first to admit that these downgrades shouldn't mean much; but to the anti-austerians it provides fuel...as you'll see from Krugman later too. 

The interesting point that Wolf makes though, is what a rating downgrade actually means for a sovereign that issues its own currency. For a risk of default is essentially not possible unless it is intentional and that would then moot the whole point of a rating in the first place. 

Wolf goes on to say that since it doesn't imply economic conditions - at most - it just reminds people of what they already know. So perhaps it accounts for an underlying inflationary or exchange rate risk factor. If this were the case, then this is clearly very different from a genuine risk of default. 

Economics aside, the main thing is political because the wise(!) George Osborne once said that he would,

 "Cut the deficit more quickly to safeguard Britain’s credit rating. I know that we are taking a political gamble to set this up as a measure of success. Protecting the credit rating will not be easy. But the economic risk of not setting ourselves this benchmark is not one that I am willing to take ... We will protect Britain’s credit rating and international reputation."

Oh George! 

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And then there's Krugman who put up a plot (which I'm just going to copy-paste) of borrowing costs versus gross debt ratios. It's a very simple depiction and if you're a strict austerian, in an ideal world, you'd expect that lower and lower (on both axes) is the norm. Krugman separates the euro and the non-euro countries to show the importance of being able to issue one's own currency. He's said this a million times before but it's still a neat graph:

If you're red (free to print your own currency), you're low? If you're blue, the sky's the limit?

I dunno, you tell me!