Let us have a moment of silence, please, to mark the passing of the Confidence Fairy.
Barely a week ago, leaders in Spain bit the bullet and – in the face of massive protests in the streets – delivered an intensely unpopular austerity budget that was supposed to show the bond markets that the government was serious about cutting Spain's debt.
According to austerity cheerleaders, the "brave actions" of the Spanish government should have been rewarded by the markets with greater confidence in Spain's resolve, and lower interest rates on Spanish bonds.
Instead, one of the Big Three ratings agencies, Standard and Poor's, dropped the rating on Spanish bonds to just one notch above "junk" status. It's widely speculated that this might force Spain to take that final humiliating step and ask for a full EU bailout.
The Confidence Fairy is a creation of Nobel prize-winning economist Paul Krugman: his way of mocking the nonsensical belief by policy elites in the US and Europe that austerity is the way out of an economic slump. The idea is that government belt-tightening during a recession will inspire investor confidence and, bolstered by the Confidence Fairy, they'll reward that virtue with business expansion and new jobs.
So why is it that, right after Spanish leaders made all the hard sacrifices demanded by the "austerians," the bond markets responded with a kick in the pants? Could it be that, as Krugman points out, there's virtually no evidence that this belief works in the real world?
Once again, reality disproves the existence of the Confidence Fairy. Krugman himself has several times declared the Confidence Fairy dead, only to see that irrational belief continue to drive decision-making. Indeed, in a move that beggars belief, European commission President Jose Manuel Barroso is now claiming that even more cuts are needed to fix European economies.
When will this madness end? How many failures and how much suffering will it take before European leaders finally admit there is no such thing as the Confidence Fairy?
Read more: Not only is austerity not working, writes Ha-Joon Chang in the Guardian, it's never worked in the past, either.
Sources: Avaaz, EU Observer, Reuters, New York Times, Guardian