Worried about Europe? The stock market is certainly touchy about recent developments there, with pro-austerity forces in France on their heels in the first round of presidential elections and budget-cut negotiations breaking down in the Netherlands. If you’re particularly fearful, you can see where this is headed: As the sovereign-debt crisis shifts from the periphery to the centre, the euro zone’s existence becomes seriously threatened.
But hold on: What if you happen to believe that austerity measures are the wrong approach during times of economic weakness – that cutting spending when an economy is contracting merely reinforces the downturn? Take it away, Paul Krugman:
“If [French President Nicolas]Sarkozy somehow pulls off an upset win, it will mean more of the same European economic orthodoxy – the insistence that fiscal responsibility is the only virtue and austerity the universal answer,” he said in a weekend blog post on the New York Times website, prior to the first round of voting that ultimately handed Mr. Sarkozy a second-place finish. “This orthodoxy somehow retains its grip despite overwhelming evidence that it’s wrong and disastrous failures in practice.”
On the other hand, a victory in the second round of voting by Socialist Party leader François Hollande might not be the anti-austerity disaster that markets fear: Mr. Krugman aruges that Mr. Hollande “would shake things up, and offer at least the possibility of something better.”
For now, though, stock markets remain gripped by the view that any stumble in move to impose austerity measures is a bad thing. In early afternoon trading, the S&P 500 was down 13 points or 1 per cent, to 1365. The CBOE volatility index, seen by many observers as a “fear gauge” jumped 11 per cent, to 19.4.