Paul Krugman on Who Is Really to Blame for Europe's 'Slow Motion Disaster'

Paul Krugman is guardedly optimistic about the U.S. economy, which seems to be climbing slowly out of the deep trench of the global financial crisis. Not so with Europe, where, he writes, bad ideas have proven to have an enduring grip. Unemployment there is twice what it is in the U.S. and deflation looms. Like Japan before it, Europe appears to be having a lost decade.

Was this necessary? No, Krugman writes in Monday's column. And without mincing any words, he lands the blame squarely at the feet mostly of Germany, which has used its economic might to inflict austerity and other punitive monetary policies on the rest of Europe. Krugman: 

I’m not denying that the Greek government behaved irresponsibly before the crisis, or that Italy has a big problem with stagnating productivity. But Greece is a small country whose fiscal mess is unique, while Italy’s long-run problems aren’t the source of Europe’s deflationary downdraft. If you try to identify countries whose policies were way out of line before the crisis and have hurt Europe since the crisis, and that refuse to learn from experience, everything points to Germany as the worst actor.

In fact, other countries in Europe have not really been spending as irresponsibly as the dominant narrative would suggest.

But what about debt? Isn’t non-German Europe paying the price for past fiscal irresponsibility? Actually, that’s a story about Greece and nobody else. And it’s especially wrong in the case of France, which isn’t facing a fiscal crisis at all; France can currently borrow long-term at a record low interest rate of less than 1 percent, only slightly above the German rate.

What is needed is public investment to stimulate the ailing economies and stop the deflationary spiral. No such luck, Krugman writes:

Yet European policy makers seem determined to blame the wrong countries and the wrong policies for their plight. True, the European Commission has floated a plan to stimulate the economy with public investment — but the public outlay is so tiny compared with the problem that the plan is almost a joke. And meanwhile, the commission is warning France, which has the lowest borrowing costs in its history, that it may face fines for not cutting its budget deficit enough.

What about resolving the problem of too little inflation in Germany? Very aggressive monetary policy might do the trick (although I wouldn’t count on it), but German monetary officials are warning against such policies because they might let debtors off the hook.

And so, bad ideas continue to prevail and wreak their havoc. And as long as the European elite buy into them, the damage will continue. When, Krugman wonders, will reality intrude?


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