I jumped the gun and gave credit where credit was not due
focusing potential ECB purchases on the sovereign debt of those countries with high interest rates would have serious adverse effects. It would reduce pressure on the governments of Italy, Spain, and other high-interest countries to make the politically difficult decisions that are needed to cut long-term fiscal deficits. Spain needs to exercise greater control over its regional governments’ budgets, while Italy needs to shrink the size of its public sector. An ECB policy that artificially reduces their sovereign borrowing costs would make these steps even more politically difficult.
Feldstein is arguing economic policy based on a “morality” argument where debt and deficits are bad and should be discouraged, and by doing anything, the scofflaws are just being encouraged.
Where this goes wrong is that the Spanish and Italian bond yields are rising more as a result of the refusal of the central bank (the ECB) to defend the Eurozone, something which the ECB has now pledged to do, subject to approval of the Bundesbank, the German central bank.
The poor governance of the Eurozone with the Bundesbank having implicit veto power over the ECB’s policy will continue to inhibit dealing with the crisis. There are plenty of times to worry about deficits, but not when the integrity of the Eurozone is in doubt. Then, you must focus solely on saving it (if you want to save it), by any means necessary.