By William K. Black
(Cross posted from Benzinga.com)
German Chancellor Merkel wishes to stamp out any belief that there is a “magic bullet” to deal with the renewed euro zone crisis. Merkel’s response to the crisis, however, is the fundamental cause of the second-stage of the crisis and it is the product of magical (un)realism – a series of economic myths that she asserts as if they were facts.
Angela Merkel warns there is no ‘magic bullet’ to beat debt crisis
Merkel’s rhetoric is intended to ridicule opponents of the Berlin Consensus – the austerity dogma that has thrown the euro zone back into recession and the periphery into depressions. Tens of millions of Europe’s citizens, however, hate the Berlin Consensus’ austerity dogma as recent elections have shown. My colleagues and I have explained many times why pro-cyclical policies (e.g., austerity in response to a Great Recession) make recessions more common and severe. Counter-cyclical fiscal policies are not “magic” – automatic fiscal stabilizers work, they make recessions less common and less severe for reasons that are understood. As we have also explained, it is proponents of austerity as a response to a Great Recession who rely on magic. Paul Krugman’s withering phrase is that austerity proponents are perpetually waiting for the arrival of “the confidence fairy.”
