Saturday, September 10, 2011

Krugman on the Death of the Euro

Paul Krugman finally gets the euro situation:
Did the euro just enter its death throes?

OK, I know that sounds over the top, and I hope it is. But recent developments are really, really bad...

The key point, which I’ve finally taken fully on board, is that in addition to the huge problems of adjustment created by a rigid exchange rate in the aftermath of a bubble, the fact that European nations no longer have their own currencies leaves them vulnerable to self-fulfilling debt crises – in effect bank runs on governments rather than banks (although those too).
Naturally, his "solution" is money printing:
To head off this risk, somebody – the EFSF, the ECB, whatever – has to be ready to act as lender of last resort; Eurobonds would have served much the same purpose.
The real solution is. of course, the dismantling of the eurozone and allowing each country to fend for itself, with their own currencies. Some will act responsibly (probably Germany), some will act recklessly (perhaps Greece), but we won't end up with European co-ordinated inflation, which is where we are headed with the one currency.

With mad money printing by Bernanke in the US, if the EU becomes a money printer, we will for the first time in the history of the world face near global inflation.

As for Krugman's take on the resignation of the ECB chief economist Juergen Stark , he is way off base:
By resigning from the ECB, Juergen Stark has conveyed, deliberately or not, the message that there will be no such lender of last resort, that there isn’t enough political cohesion in the eurozone to stand behind countries under market attack.
Stark has been a consistent critic of the ECB's program of purchasing government bonds of debt-ridden European nations.. He has said eurobonds would create false incentives for indebted countries.

It is not yet clear who will replace Stark, but Stark was no supporter of the ECB becoming a lender of last resort. His resignationcreates the possibility that someone more likely to support the ECB as a lender of last resort could take his place. The resignation will, thus, have a neutral to inflationary bias on the ECB.


  1. This statement I found on zh this week sums up Krugman and all his buddies and what is going on right now:

    "Prepare to watch many more such episodes over the next 2 years as the world voodoo economist PhDs have so carefully constructed for themselves in their ivory towers comes crashing down."

  2. "stand behind countries under market attack."

    Seems like Krugman sees the market as an enemy of sorts.

  3. Deft,

    You beat me to it! Indeed, that is the most important part of this passage. To econometrician like Krugman, the market is the enemy, since it never cooperates with their schemes.

  4. LLR implies there is something being lent. Question for Krugman: what is it that the LLR is lending?

  5. I read "market attack" and nearly leaped out of my chair! It is so telling the way he perceives the market. He cannot see that the market is attempting to correct the problems created by the government intervention that he champions. The market is in and of itself a problem to him that must be squelched for there to be economic prosperity.

    In other words, the free choices of individuals buying or abstaining from buying must be stamped out for Krugman's ideal world to be realized.

  6. How long before the U.S. is willing to merge with Europe and/or vice versa?