After the ECB and German Court decisions, there is a strange calm on the Italian and Spanish spreads versus ten years German bonds, which are oscillating around 350 (Italy) or 420 (Spain) basic points, hundred or more points less than in July.

But the Egb risk index by Royal Bank of Scotland signals that from April the index for all European countries (a part Finland and Ireland) is increasing. The index synthesizes in one number (from zero for the highest risk – Greece- to 100 for the lowest- Finland) seven variables referring to the public budget, seven to the financial sector plus five indicators of risk. Now Italy goes down from 65 to 56, and Spain from 52 to 42, and even Germany index decreases from 99 to 94.

There is a simple explanation: the worsening of the economy. Few days ago the IMF Outlook published the growth rates forecast, that can be compared with EU estimates on April:

Growth rates                                       IMF October                           EU April

Euro area                                                     0,2                                          1 ,0       

Germany                                                      0,9                                           1,7  

France                                                          0,4                                           1,3

Italy                                                              -0,7                                           0,4 

Spain                                                          -1,3                                           -0,3       

Greece                                                        -4,0                                            0  

Portugal                                                      -1,0                                            0,3
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There is a Box (1.1), by Olivier Blanchard, IMF chief economist, and Daniel Leigh) entitled “Are We Underestimating Short-Term Fiscal Multipliers?”

. The answer is yes. “These results suggest that actual fiscal multipliers were larger than forecasters assumed. But what did forecasters assume about fiscal multipliers? Answering this question is complicated by the fact that not all forecasters make these assumptions explicit. Nevertheless, a number of policy documents, including IMF staff reports, suggest that fiscal multipliers used in the forecasting process are about 0.5. In line with these assumptions, earlier analysis by the IMF staff suggests that, on average, fiscal multipliers were near 0.5 in advanced economies during the three decades leading up to 2009.6. If the multipliers underlying the growth forecasts were about 0.5, as this informal evidence suggests, our results indicate that multipliers have actually been in the 0.9 to 1.7 range since the Great Recession. This finding is consistent with research suggesting that in today’s environment of substantial economic slack, monetary policy constrained by the zero lower bound, and synchronized fiscal adjustment across numerous economies, multipliers may be well above 1".

A (negative) multiplier of 1 or more simply means that the fiscal austerity is self-defeating. That is, a fiscal adjustment, for example, of 1 per cent of GDP brings about a GDP contraction of 1,5 per cent. When Mrs Merkel says that every German housekeeping knows that you cannot take care of debt with (additional) debt, says nothing new, but deeply wrong, as Keynes explained eighty years ago. The Greece experience is clear: after six years of recession the debt-gdp ratio is 170% (it was 104% on 2007). If you replay that Greek is not a good pupil, look at Portugal, a disciplined pupil: the debt ratio forecast on 2013  is 124 instead of previous forecast of 115,7%.