Monday, February 08, 2010

Paul Krugman On The Spanish Fiscal Situation

Paul Krugman misleads his readers on the cause of the Spanish fiscal situation. He is correct to note that Spain a few years ago ran a surplus in its budget and had stronger fiscal situation than Germany, but that it now runs a much bigger deficit than Germany. Krugman claims that the deterioration of its finances is simply a result of the deep slump in Spain.

Yet the fact is that output hasn't decreased more in Spain than in Germany. In fact the decline has been somewhat smaller (-4.0%, versus -4.8% in Germany and -5.1% in Krugman's role model Britain).

The reason for the dramatic weakening in Spanish public finances is instead that the Spanish government in 2008 decided upon massive "stimulus packages", something Krugman completely ignores, either out of ignorance or out of dishonesty.