Krugman on How to Avert a Complete Catastrophe for Greece and for Europe

Paul Krugman recounts some of his heartbreaking travels around Greece in Monday's column. Years of severe austerity have wrought untold human suffering there. He visited a homeless shelter and heard stories about how the health care system in the country has collapsed. Wages have been cut for those lucky enough to have jobs. Unemployment is skyhigh. 

As Krugman summarizes the story so far:

At the end of 2009 Greece faced a crisis driven by two factors: High debt, and inflated costs and prices that left the country uncompetitive.

Europe responded with loans that kept the cash flowing, but only on condition that Greece pursue extremely painful policies. These included spending cuts and tax hikes that, if imposed on the United States, would amount to $3 trillion a year. There were also wage cuts on a scale that’s hard to fathom, with average wages down 25 percent from their peak.

These immense sacrifices were supposed to produce recovery. Instead, the destruction of purchasing power deepened the slump, creating Great Depression-level suffering and a huge humanitarian crisis.

When the Greek public could not take any more they elected Syriza, a left-wing coalition that has promised no more cuts—a brand new direction. The question is, can Syriza and Greece's creditors come to an agreement and avoid Greece's exit from the euro, which Krugman and others say would be catastrophic for Greece, and bad for the rest of Europe as well.

Krugman thinks there is a way, and outlines a deal that would be to everyone's benefit: "Basically, a standstill on further austerity, with Greece agreeing to make significant but not ever-growing payments to its creditors. Such a deal would set the stage for economic recovery, perhaps slow at the start, but finally offering some hope."

As reasonable as it seems, that deal does not appear to be in the offing, and ordinary Greek citizens suspect that the rest of Europe just wants their country to fail. There is a "pervasive atmosphere of distrust." Krugman says, as well as the problem that "political uncertainty is hurting tax receipts," at a time when Greece can ill afford it.

Krugman concludes:

It doesn’t have to be this way. True, avoiding a full-blown crisis would require that creditors advance a significant amount of cash, albeit cash that would immediately be recycled into debt payments. But consider the alternative. The last thing Europe needs is for fraying tempers to bring on yet another catastrophe, this one completely gratuitous.