Something extraordinary happened in Europe this week. Enrico Letta, Italy’s Prime Minister nominee, upon being tapped to form the next government made a bold press conference announcement that his primary objective upon taking office will be to end Italy’s austerity program and join other leaders calling for an end to austerity across Europe. Presto! The bond markets did not go berserk. Contrary to wide expectations, instead of punishing Italy investors remained calm and did not proceed to increase its borrowing costs. And voila, the euro crisis has come to an end.
News also spread like wildfire this week about the notorious austerity paper scandal. An academic paper by the well regarded economists Kenneth Rogoff and Carmen Reinhart, which has been used by policymakers far and wide to justify their fiscal retrenchment, has been discredited. Among other high profile examples, EU Vice-President for Economic and Monetary Affairs Olli Rehn gave several prominent speeches in the early stages of the crisis explicitly basing European austerity programs on their work.