Paul Krugman: The Conscience of a Liberal

January 14, 2012, 11:31 AM

S&P On Europe

S&P’s downgrade of a bunch of European sovereigns was no surprise. What was somewhat surprising — and which went unmentioned in almost all the news stories I’ve read — was why S&P has gotten so pessimistic. From their FAQs:
We also believe that the agreement [the latest euro rescue plan] is predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone. In our view, however, the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. As such, we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues.
And today we read about the response:
German chancellor Angela Merkel has called on eurozone governments speedily to implement tough new fiscal rules after Standard & Poor’s downgraded the credit ratings of France and Austria and seven other second-tier sovereigns.
Still barreling down the road to nowhere.


Share your thoughts.
    • Stuki Moi
    • CA
    Wow! The guys who take a cut of bond issues, pontificates that the world will end, if developments that make investing in bonds less attractive, are allowed to take place! Who could have guessed?

    The truly sad thing about the gyrations in Europe is that commentators who ought to know better, talk as if simply (heck, even flippantly) defaulting on unsecured credit (which most sovereign issues really are), is somehow the end of anything more than the silly illusion that some, politically correct, kinds of credit, can be extended risk free. Well, it can't. And that ain't the fault of Greek children not yet born. So, to those dumb enough to lend money on the backs of that particular delusion: Good luck, hope you learned your lesson, and choose your investments wiser next time.
      • Brian Delroy
      • Adelaide, Australia
      Kudos to S&P. It really looks like they have been reading your columns.
        • lisztian
        • San Diego, CA
        Astonishing; spread the word: S&P has competent analysts!!

        Less astonishing: Germany still ain't listening.
        1. OK, I am not a historian (not formally educated as such), but wasn't there a much stronger push by the left in 1930s? Wasn't there a lot of support here for Hitler's policies because of his hard line on destroying the left, the labor movement, as well as using hate/fear as a tool to organize?

          Does anyone really think that the monied power-block is going to give anything that we aren't demanding in the streets -- forcefully demanding.

          Also, as usual, the so-called minority communities are taking it at a gut level that whites only read about. We have crimilazed being young, male, and black. We are breaking up familes using our immigration laws at a rate not ever seen in this country. We are allowing unemployment rates in the cores of our cities that are ripping through the economic viability of those communities like a buss saw through plywood.

          It is time for solidarity of the 99%. Good step has been the transfer of OWS action from Freedom Park to occupying homes up for foreclosure. Next we need to find a way to stop the mass incarceration of black men and brown families. One good step would be to restore civil rights to black and brown men convicted of felonies in all the states. Another would be to stop (not just slow down but stop altogether) the deportation of family members that leaves behind a family berift and deeper in poverty.

          And we need to support truth-tellers like the Professor, if we are to change the direction we are barrelling down right now.
            • Siwash Rock
            • Vancouver, BC
            The political opposition parties in France, Spain and Italy need to get their teeth into these poor austerity plans. Sarkozy could really be damaged if the opposition latched onto austerity cuts being completely ineffective. That would play well in the upcoming elections in April.

            It is their job to pick up these foolish economic policies and punch holes through them.
              • OliverH
              • Germany
              Actually, the explanation is an exercise in paradox. Because what they did actually strengthens the position of the current German government - with the German rating intact, they'll argue they did everything right.

              I'm frankly not sure what game S&P is playing there, but I am getting the impression they quite like everyone paying so much attention to them and have no interest in this ending any time soon. Despite the fact that the German economy contracted in the last quarter, they act as if everything is A-ok in Germany. And despite the fact that interest rates improved for Spain and Italy, they downgraded them not one but two notches, thereby making sure they kill the recovery in interest rates.

              In any case, introducing fiscal discipline is a sine-qua-non requirement for Merkel to be able to convince anyone that Germany should invest into Greece, so I wouldn't count out the correct actions following out of this. But if S&P and company continue to have their actions a solid mismatch with their talk, anything is possible.
              1. Merkel and the others in charge are not the ones suffering from the policies they execute. Perhaps when faced with a social explosion or complete economic collapse they'll change their minds?
                  • Very Serious Sam
                  • Germany
                  Are we to understand that for once you agree with the analysis of a rating agency?
                    • joel
                    • Oakland, CA
                    • Trusted
                    No. For once they partially agree with PK.
                1. This whole sorry story raises a question: Why are German economists such spießbürgers?

                  It can't be the fresh water.
                    • raiserw
                    • Toulouse
                    The lead story on Le Figaro's Internet page at the moment contains exactly the item about the gap between competitivity of the Euro core and periphery. This as the sub-head on the lead page before clicking to the full story.

                    Glad to see at least somebody is paying attention. I hope the appropriate political and economic actors are, but I'm not holding my breadth.
                    1. S & P? S & P? This is the ratings agency that rated the mortgage-backed CDOs and CDSs and other exotic derivatives triple-A, if I remember correctly, isn't it?
                      So why are people taking these discredited ratings agencies seriously? Perhaps for the same reason that people take mainstream, academic economics seriously?
                      Two utterly disgraced, utterly failed institutions(or groups): ratings agencies and the economics profession. Again I ask, why are people even listening?
                      1. las, Professor, in the sentence "we believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating", thre's the word ALONE. So iscal austerity is necessary for S&P but not alone. And what else ? More and more free market, flexibility and so on
                          • keefie
                          • .co
                          If i was a european, I'd be irked to be judged by a discredited US company . Merkel is a pol. That's what her voters want to hear The rest of Europe let Germany climb back to where it is now, More fool them. The beatings will continue..
                          1. Merkle just read "...the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone." and basked in the affirmation.
                              • Ron Cohen
                              • Waltham, MA
                              I grew up during World War II and its aftermath. I must say this: Twice in living memory, Germany brought Europe to its knees, and with it nearly the entire world. Now, Germany is about to do so again.

                              Each time, the crisis arises from Germany's drive to dominate the Continent. Each time, that drive is justified in the name of a superior German virtue -- be it racial, cultural or, more recently, prudential.

                              That it is easier to buy from Germany than to sell to her, has been a common plaint of her neighbors for years. In fact, Germany's export-driven economy is a beggar-thy-neighbor model, similar to China's. It is a model of their choice, and it is a model they could change.

                              By insisting on austerity during a recession, Germany will almost certainly destroy the European common market as we know it today, and cause untold misery for millions in the years ahead.
                                • Mike
                                • Wi
                                It's all part of a plan to rope Europe into a centrally controlled trading block.

                                Step 1- create debt crisis - GS instrumental in hiding debt in Greece and other countries, Rating agencies gave everything a triple AAA rating. This is no different than the housing bubble in the US.

                                Step 2 - Trigger crises

                                Step 3 - Use banks and rating agencies to repeatedly put a pillow on the face of smaller EU countries until they hand over the keys to the house and power over their population. We have already witnessed democratically elected governments removed from power and replaced with central bank hand picked leaders. We will see eventually most of the smaller countries capitulate and hand over the reigns of power. Then and only then will the wall of money flow from the EU central bank and the US fixing all of the debt problems for the EU, and improving their competitiveness by devaluing their currency. Of course we are trying this in the US and ASIA and well everywhere.
                                1. .

                                  In my admittedly limited experience, every single person who has used the word predicated gave me the impression that they were trying to hide their small caliber with their cumbersome word.

                                    • AMR
                                    • Emeryville, CA
                                    Perhaps Merkel feels that S&P will take things down only this far in any event, since S&P seems content to leave Ireland's rating unchanged despite that county's being "susceptible to worsening external economic conditions" because of the austerity S&P otherwise praises.

                                    S&P seems as unreliable and inconsistent as ever.
                                    1. Another great post. The new comments tool at the times is horrible. It takes twice as long to open the comments and once you do it only shows one full comment and then a half of another comment. So then you have to click show more comments so it effectively takes four times as long to view comments. I have a pretty good Internet connection too that works fine for all other sites with the exception of the times. It makes it a chore to read your column / blog (I still do).
                                        • Paddler59
                                        • Maui
                                        Anyone want to explain to me why the heck we even care what these ratings agencies say anymore given their craven opportunism in rating CDOs and other junk investments as AAA and helping in a huge way to precipitate the financial meltdown?

                                        These clowns ought to be in jail, not in business.
                                        1. It seems that Germany is playing a variation on the old Mercantilism concept, i.e., it's OK to strip economic value out of other countries so as to pile it up at home.
                                          1. Maybe we should revive the Articles of Confederation. It's looking more and more like the European model day by day...
                                              • IU
                                              • Mobile
                                              'the financial problems facing the eurozone are as much a consequence of rising external imbalances and divergences in competitiveness between the EMU’s core and the so-called “periphery”. '

                                              OK, so again we come to the question of WHY there is the imbalance in competitiveness, and what kind of "reforms" or "structural reforms" are supposed to fix it and how. I know 4% inflation is the fix. But I think we will not know the fix until we know the cause.
                                                • Jake Wagner
                                                • Santa Barbara, CA
                                                From Wikipedias article on three card monte:

                                                Three-card Monte is an example of a classic short con in which a shill pretends to conspire with the mark to cheat the dealer, while in fact conspiring with the dealer to cheat the mark.

                                                Standard and Poors acted as the shill in transactions between investors/pension funds and the Wall Street Banks in the runup to the financial crisis of 2007/08.

                                                More specifically, S&P rated as AAA the CDO's created by investment banks, thereby getting investors and pension funds to invest in CDO's based on mortgages which were then led to staggering losses for the investors/pension funds. Indeed, S&P was paid huge fees by the investment banks and therefore had an incentive to hide the fraudulent nature of the CDO's.

                                                American lost trillion in their 401K's and public pension funds became unfunded as a result. Millions of Americans cannot afford retire because of the three-card monte played skillfully by S&P.

                                                In a just society, the top executives of S&P would join Bernie Madoff in prison. But ours is not a just society.

                                                So S&P---yet another corrupt US institution---lives to sit in judgment over the European economies.

                                                Why doesn't Obama call for the prosecution of the top investment banking crooks and their cronies at S&P? Americans have a vested interest in restoring the integrity of its financial services industry.
                                                  • Grumpy old man
                                                  • United States
                                                  S&P needs to speak more concisely:
                                                  It's the austerity, stupid.

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