When misery is the only option

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Yesterday I lamented the dearth of optimism regarding the global economy, in spite of the fact that several emerging markets are having a relatively good crisis.

Alas, analysts at Moody's have disregarded my plea.

In today's Economix, Catherine Rampell points us to a revamped "misery index", which traditionally measures the sum of the unemployment and inflation rates. Since today's inflation rates are relatively low, Moody's has substituted inflation with national fiscal deficits.

The result? A lot of misery on the European periphery:

Moody's Misery Index Deficits combined with Unemployment 

Many economists, most notably Paul Krugman, have been calling for increased government spending in order to boost employment. This makes a lot of sense for countries like the United States, where there will be few repercussions from greater short-term deficits, and many benefits from reduced unemployment (including, according to Krugman's logic, an eventual reduction in the long term deficit).

Yet for countries such as Latvia, Lithuania, Ireland, and Greece, this is not an option. The former two are desperately trying to maintain currency pegs to the euro, thus they cannot afford any more fiscal profligacy (just ask Argentina). The latter are trying to maintain the confidence of international investors, who are increasingly nervous about sovereign defaults in light of the recent events in Dubai. This has resulted in reduced government spending, which is likely to aggravate unemployment over the short to medium term. Yet there does not seem to be much of an alternative (as Greek Prime Minister George Papandreou is quickly discovering).

In some countries, misery may be the best solution to avoiding long-term economic malaise.

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