French government has collapsed, and it's partly Paul Krugman's fault

By Rob Wile

This morning the French government collapsed. All the ministers have resigned, and Hollande will have to appoint new ones. Paul Krugman deserves some of the blame.

The incident that immediately precipitated the resignation of French Prime Minister Manuel Valls' cabinet was an interview given by Arnaud Montebourg, France's economics minister to LeMonde, in which he protested his own government's ongoing austerity policies.

As evidence of that policy's failure, Montebourg cited the former Princeton professor and New York Times columnist.

Here's the exchange:

LeMonde: Has Europe, and France too in the past two years, focused too much on budget contraction?

Arnaud Montebourg: That's not my observation, that's the diagnosis of financial institutions across the world, starting with the IMF which, whose director, Christine Lagarde, warned European leaders about an excess of budget consolidation. Paul Krugman, a Nobel laureate, also wrote on Aug. 13, "The nightmare scenario in Europe is not a hypothetical. The news that industrial production has ground to a halt raises the prospect of a new recession in Europe - its primary cause, austerity." These warnings have also been sounded by other leaders of world powers including Barack Obama.

Despite the noise France's cabinet reshuffle is making this morning, it may not amount to much. As Krugman also pointed out, there's only so much European governments can now do at this point to address severely weak underlying economic fundamentals. Europe's fate mostly now lies in the hands of ECB Chief Mario Draghi, who seems to fully understand the stakes but also faces vocal monetary hawks out of Euro zone member countries.

That may include France itself. By accepting his own cabinet's resignation, President Francois Hollande is signaling that he will remain committed to his announced budget cuts and corporate tax reductions. Meanwhile multiple reports indicate Montebourg and education minister Benoit Hamon, who also lashed out at Hollande, won't survive into the new coalition.

Thus, any satisfaction Montebourg ultimately receives may come at the grim price of further economic malaise.