Killing the Euro, by Paul Krugman, Commentary, NY Times: Can the euro be saved? Not long ago we were told that the worst possible outcome was a Greek default. Now a much wider disaster seems all too likely..., even optimists now see Europe as headed for recession, while pessimists warn that the euro may become the epicenter of another global financial crisis.
How did things go so wrong? The answer you hear all the time is that the euro crisis was caused by fiscal irresponsibility. Turn on your TV and you’re very likely to find some pundit declaring that if America doesn’t slash spending we’ll end up like Greece. Greeeeeece!
But the truth is nearly the opposite. Although Europe’s leaders continue to insist that the problem is too much spending in debtor nations, the real problem is too little spending in Europe as a whole. And their efforts to fix matters by demanding ever harsher austerity have played a major role in making the situation worse. ...
Warnings that this would deepen the slump were waved away. “The idea that austerity measures could trigger stagnation is incorrect,” declared Jean-Claude Trichet, then the president of the European Central Bank. Why? Because “confidence-inspiring policies will foster and not hamper economic recovery.”
But the confidence fairy was a no-show. ...
At this point, markets have lost faith in the euro as a whole, driving up interest rates even for countries like Austria and Finland, hardly known for profligacy. And it’s not hard to see why. The combination of austerity-for-all and a central bank morbidly obsessed with inflation makes it essentially impossible for indebted countries to escape from their debt trap and is, therefore, a recipe for widespread debt defaults, bank runs, and general financial collapse.
I hope, for our sake as well as theirs, that the Europeans will change course before it’s too late. But, to be honest, I don’t believe they will. In fact, what’s much more likely is that we will follow them down the path to ruin.
For in America, as in Europe, the economy is being dragged down by troubled debtors — in our case, mainly homeowners. And here, too, we desperately need expansionary fiscal and monetary policies to support the economy as these debtors struggle back to financial health. Yet, as in Europe, public discourse is dominated by deficit scolds and inflation obsessives.
So the next time you hear someone claiming that if we don’t slash spending we’ll turn into Greece, your answer should be that if we do slash spending while the economy is still in a depression, we’ll turn into Europe. In fact, we’re well on our way.