Debt crisis: Eurozone death drive
26 September 2011
The New York Times
In talks with the IMF, European governments have pledged to take “all necessary measures” to prevent the collapse of the Eurozone. However, as New York Times columnist and Economics Nobel Prize laureate Paul Krugman points out, until now their actions have only served to undermine the single currency.
Is it possible to be both terrified and bored? That’s how I feel about the negotiations now under way over how to respond to Europe’s economic crisis, and I suspect other observers share the sentiment.
On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened – and a euro collapse could inflict vast damage on the world.
On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact – namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.
So now what? Europe’s answer [to the economic and fiscal crisis and the collapse of investor confidence in the peripherial nation’s bonds] has been to demand harsh fiscal austerity, especially sharp cuts in public spending, from troubled debtors, meanwhile providing stopgap financing until private-investor confidence returns. Can this strategy work?
Not for Greece, which actually was fiscally profligate during the good years, and owes more than it can plausibly repay. Probably not for Ireland and Portugal, which for different reasons also have heavy debt burdens. But given a favorable external environment – specifically, a strong overall European economy with moderate inflation – Spain, which even now has relatively low debt, and Italy, which has a high level of debt but surprisingly small deficits, could possibly pull it off.