Watch Europe: Stevens and Krugman warn

Glenn Stevens couldn’t be accused of cheating.

After all, the Reserve Bank Governor wouldn’t have had time to read Paul Krugman’s latest essay, in the New York Times, before he issued today’s statement, confirming that our interest rates will be kept on hold this month.

Yet the Governor’s views, on one critical matter, are remarkably similar to those of the Nobel Prize winning US economist.

That matter, of course, is Europe.

Mr Stevens is blunt about it.

“…Europe will remain a potential source of adverse shocks for some time,” he says

For his part, Mr Krugman talks of “…Europe’s still extremely dire economic situation.”

Mr Stevens noted first that: “financial markets have initially responded positively to signs of further progress towards longer-term sustainability in European financial affairs…”

Then he talks of the shocks.

Mr Krugman also has grave reservations about the likely long term effects of the EU fix, last week.

He notes that Angela Merkel, the apostle of austerity, did give “a little ground” agreeing to “both easier lending conditions for Italy and Spain” and a rescue plan for private banks that “might actually make some sense.”

“But these concessions remain tiny, compared with the scale of the problems,”  Krugman  warns.

The US economist then takes a big step beyond anything Mr Stevens had to say.

He says European authorities have yet to realise that their austerity programs won’t work.

“Part of the problem is the fact that German politicians have spent the past two years telling voters something that isn’t true,” Krugman says.

“Namely that the (European debt) crisis is all the fault of irresponsible governments in Southern Spain.”

Writing from Madrid, Krugman says Spain, which has attracted much attention recently, actually had low debt and budget surpluses on the eve of the crisis.

Its problems had arisen from a “vast housing bubble” that banks all across Europe – including Germany – had “helped to inflate.”