Contractionary policy is contractionary.

I loved that quote from Paul Krugman's blog post today, "The Death of the Confidence Fairy".  Citing the IMF, he points out that the fiscal conservative fallacy (that a lack of business confidence due to growing sovereign debt is why businesses have so far failed to invest in labor) is, and always has been, wrong.

But this time around, there are a few more constraints that would otherwise cover-up the effects of a contractionary fiscal policy:

• Inflexibility to devalue one's own currency owing to:
• individual countries using a single currency (the Euro);
• the reality that if everyone tried to devalue their currency at the same time, no one would effectively benefit, as the relative values to each others' currency would end up being the same;
• Monetary policy is against a wall -- the zero-bound wall where interest rates are practically at zero.

Which basically means that austerity will end up pushing countries into a double-dip recession, if they haven't already done so.

And, oh by the way, did you notice the little bank problem they have over in Europe?  Besides the Greek problem, the undercurrent that is pulling Europe down, is the fear that major European banks are under-capitalized, and will end up falling like dominoes.  You can see it in the Bloomberg Europe 500 Banks and Financial Services Index (BEBANKS:IND).