Monday, January 16, 2012

S&P Downgraded Eurozone Sovereign Debt Because Of Austerity Plans, But Germany Ignores Warning

Paul Krugman goes beyond the headlines which tell us that S&P has downgraded the sovereign debt on many eurozone nations. S&P downgraded the sovereign debt because it believes that the problems in the eurozone are deeper than many believe. Trade imbalances between core nations and the periphery are a big part of the problem, and the focus on fiscal austerity as the remedy is misplaced. It will increase budget deficits rather than improving them because GDP and state income will fall as a result of austerity measures.

Krugman reinforces the message from S&P by contrasting it with the response from Angela Markel. She proclaimed that they should speed up the austerity plans in the periphery in response to the warning from S&P. Either she is uninformed about S&P's rationale for the downgrade, or she has chosen to ignore it for other reasons.

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