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.
Posted by Mark Thoma on Friday, December 2, 2011 at 12:33 AM in Economics, International Finance
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Krugman does not have a long-term framework (for example, he has only recently become interested in the long-term evolution of private debt, though it is a key to understanding the current crisis), so he just stretches the definition of “short-term” and keeps making the same Keynesian argument – and that’s very disappointing.
And while you're at it, explain where the confidence fairies have been since the first time "inflation is coming" has been mentioned. Include the amount of time in months people have been screaming "inflation!" and what the figures are for that entire period, and what the market is telling us it is likely to be in the future.
Austerity. What splurging needs cut.
The cutting frenzie is used as anti New Deal agitprop, just a continuation of the post WW II anti New Dealers. That is why the Greece false analogy comes up in US austerity screed.
Compared to the Eurozone the US spends three times share of its GDP occupying military sink holes around the world.
US austerity must start at closing down the corporatists' military machine.
That's the only way forward that makes any sense. The other way, austerity (a misnomer, liquidation is more accurate), offers only destitution for a majority of citizens.
Employment is the only metric to consider right now. Everything else, including deficits and debt, are useless distractions.
It's truly incredible that so many important public officials, like Trichet, have talked themselves into this kind of superstitious voodoo - and have actually bet on it as the main tool of policy in a major recession.
Imagine that all of the developed world's public health officials, faced with a major epidemic, had suddenly concluded the thing to do is to order up truckloads of leeches and subject their countries to a regime of massive bleeding. Some of these officials believe that bleeding is medically effective. Others only believe that since some folks believe bleeding is materially effective, we can count on the placebo effect alone to end the epidemic.
And all the while cases full of effective medicines sit unopened on pallets in the government warehouses.
Both the true believers in bleeding and the true believers in the omnipotence of the placebo effect should be flogged.
Look at the way John F. Kennedy linked up with Norman Cousins and SANE to turn around public opinion on the atmospheric nuclear test ban treaty. Its a matter of genuine commitment to a cause.
And what does Germany and France (and other countries in Europe) spending have to do with PIIGS spending? I doubt that more spending with 7+% yields on government debt would be positively received. Printing money may temporarily lower interest rates but that really doesn't seem to be the PIIGS problem does it? They didn't get a mountain of debt because of Germany, France, etc.
December 2, 2011
Profligate Zombies
By Paul Krugman
Dean Baker has a series of posts * about bad reporting on the euro crisis; he is evidently, and with good reason, upset at the way just about every report states as a fact that excessive borrowing caused the crisis.
This is another one of those zombie ideas that permeate our discourse; it’s part of the narrative, and no amount of evidence can kill it or even stop reporters/editors from stating it as a fact.
So, one more time, here are some data (from the IMF World Economic Outlook database). Debt as a % of GDP for Spain and Italy:
[Gross debt as percent of GDP for Italy and Spain, 199-2011]
Before the crisis Spain had low and declining debt. Italy had high debt inherited from the past, but it was steadily working that debt down relative to GDP. Neither country was being profligate — that’s just not what happened. Since the crisis debt has been rising relative to GDP, but that’s what happens when you have an economic crisis.
Yes, Greece. But Greece is now a tiny part of this story. As I said in today’s column, Greece (GDP of about $300 billion) is roughly Greater Miami ($270 billion). Italy and Spain are the big stories, and they were not, repeat not, fiscally profligate.
* http://www.cepr.net/index.php/beat-the-press/
I can't disagree with the gist, getting back to robust growth. But growth for debtors to get back to financial health or austerity to pay off debts is still the same.
I'm afraid that we are going into a global lost decade with a yoke of ever increasing debt because we are more concerned that bankers get paid than creating jobs and real growth.
It is just one funding mechanism after another, do we need more loans and debt or less? What is it actually paying for? Not jobs and growth in meaning full sectors of the economy.
It's time for a debt jubilee. It's been more than 50 years.
Where is that tax holiday?
Repatriation Tax Holiday to Be Proposed by Hagan, McCain
http://www.businessweek.com/news/2011-10-05/repatriation-tax-holiday-to-be-proposed-by-hagan-mccain.html