Olvier Blanchard is a very well-respected academic economist, and currently also Chief Economist at the International Monetary Fund. He sees today’s current big problems primarily due to investors.
- Self-fulfilling outcomes of pessimism or optimism, with major macroeconomic implications.
- Incomplete or partial policy measures can make things worse.
- Financial investors are schizophrenic about fiscal consolidation and growth.
- Perception molds reality.
So, the unsustainability of Euro member fiscal policy is supposedly irrelevant, compared to the insane, self-fullfilling prophesies of investors. As John Cochrane noted, the Euro leaders keep looking for the Big Announcement that will soothe markets into rolling over another few hundred billion euros of debt. Alas, the problem is reality, not psychology.