Mark Thoma figures out that Christy Romer's column is up before I do:
Christina D. Romer: Austerity Is No Quick Answer for Europem: rowth in European gross domestic product was negative in the last quarter of 2011. Unemployment in the entire euro zone in February was 10.8 percent; in Spain it was an astounding 23.6 percent… investors don’t believe that prosperity is just around the corner.
Fiscal austerity is normally a sensible response to a loss in confidence in a country’s solvency…. But the current situation is exceptional…. [L]arge rate reductions to offset the negative impact of budget cutting are impossible…. [D]epreciating the currency relative to that of their main trading partners — is not available, either…. [A]usterity is uniquely destructive right now….
The core of a more sensible approach is to pass the needed budget measures now, but to phase in the actual tax increases and spending cuts only gradually…. [C]an such plans actually work? What’s to stop policy makers from promising the moon and not delivering?
History shows that countries have done such gradual consolidations before. In 1983… the United States… in 1995, Sweden…. Australia did the same thing on a somewhat smaller scale starting a year later….
But what about bond markets?… [I]f the authorities put their seal of approval on more gradual fiscal consolidation plans and stand ready to support troubled countries if needed, market interest rates on the countries’ debts will most likely come down. If that doesn’t work, the European Central Bank could effectively cap the cost of borrowing…. [D]one after the countries had enacted specific, backloaded consolidation plans, the risk to the central bank would be manageable….
European policy makers talk about structural reforms — increasing labor market flexibility and reducing regulation — as the way to reduce wages and costs. But when overall inflation in Europe is very low, this strategy requires wages in troubled countries to fall, which rarely happens….
FINALLY, countries that are not in distress, both inside and outside Europe, could help by stimulating their own economies…. What about the United States…? The best policy here is to combine the backloaded consolidation I’m recommending for troubled countries with the short-run stimulus I’m advocating for countries like Germany…. These policies are nuanced, so they are easily caricatured as doing something with one hand and undoing it with the other. Their key element is dynamics — using credible plans to lower borrowing costs and address long-run fiscal problems, while not taking immediate austerity measures that would raise unemployment when what countries need most is growth.