Paul Krugman: Europe Is Acting Like 'Medieval Doctors Bleeding Their Patients'

When Greek voters stood up to a campaign of bullying and intimidation by voting "no" to the new round of creditor demands, they were striking a blow both for democracy and for Europe, Paul Krugman writes in today's column. "Even the most ardent supporters of European union should be breathing a sigh of relief," Krugman says.


Of course, that’s not the way the creditors would have you see it. Their story, echoed by many in the business press, is that the failure of their attempt to bully Greece into acquiescence was a triumph of irrationality and irresponsibility over sound technocratic advice.

But the campaign of bullying — the attempt to terrify Greeks by cutting off bank financing and threatening general chaos, all with the almost open goal of pushing the current leftist government out of office — was a shameful moment in a Europe that claims to believe in democratic principles. It would have set a terrible precedent if that campaign had succeeded, even if the creditors were making sense.

Greece's creditors have not been making sense for a long time, Krugman suggests. One of them, the International Monetary Fund, has even admitted that Greece could never ever pay off its debt. Krugman reiterates his argument that severe austerity is wreaking so much damage to the Greek economy that the suffering is serving absolutely no purpose. And of course, this suffering would have been inflicted for generations, and on Greeks who had absolutely no hand in the original "crime" of overspending.

He also takes the somewhat contrarian position that Greece's best bet is an exit for the euro, which has hardly helped it out in its hour of need. Though this is no easy feat, it is the "best of bad options":

Imagine, for a moment, that Greece had never adopted the euro, that it had merely fixed the value of the drachma in terms of euros. What would basic economic analysis say it should do now? The answer, overwhelmingly, would be that it should devalue — let the drachma’s value drop, both to encourage exports and to break out of the cycle of deflation.

Of course, Greece no longer has its own currency, and many analysts used to claim that adopting the euro was an irreversible move — after all, any hint of euro exit would set off devastating bank runs and a financial crisis. But at this point that financial crisis has already happened, so that the biggest costs of euro exit have been paid. Why, then, not go for the benefits?

Would Greek exit from the euro work as well as Iceland’s highly successful devaluation in 2008-09, or Argentina’s abandonment of its one-peso-one-dollar policy in 2001-02? Maybe not — but consider the alternatives. Unless Greece receives really major debt relief, and possibly even then, leaving the euro offers the only plausible escape route from its endless economic nightmare.

There's plenty of blame to go around for the Greek crisis, which resulted as much from irresponsible lending as borrowing. (Hmmm, sound familiar? like a certain housing recession-inducing housing crisis here?)

Krugman, like everyone else except the bullies, hopes the bleeding will stop.

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