Following on the heels of the G20 communiqué came the ECB’s June 2010 Monthly Bulletin, which was an unabashed restatement of neoclassical economic ideas and a call for “growth friendly fiscal consolidation” going forward. In the Bulletin, “Ricardian consumers” with rational expectations who anticipated the effects of government policies years ahead went on display, alongside inflation-averse and confidence-sensitive investors appalled at the prospect of government “crowding out” investment, future inflation, and ever-larger government debts. As Stephen Kinsella argues regarding the seemingly contradictory logic of expansionary fiscal consolidation, “Proponents of this theory argue that fiscal contraction, rather than leading to a decline in output … will result in higher output … [as] consumers and investors anticipate long run tax deductions because of cuts in expenditure [which will] offset … the contraction.” Given this version of rational expectations theory, the ECB could only conclude that austerity had to be the way forward because “the longer-run benefits of fiscal consolidation are largely undisputed.” Undisputed, that is, so long as the question is posed only in terms of this narrow rational-expectations model.

Mark Blyth, Austerity, loc. 174