Tags: Krugman | Euro | Saved | europe

Krugman: It’s Doubtful Euro Can Be Saved, But It Must Be

Monday, 30 Jul 2012 11:19 AM

By Michael Kling

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It’s doubtful that the euro can be saved, no matter what European Central Bank President Mario Draghi says, writes Paul Krugman in his column in The New York Times.

Financial markets were heartened by Draghi’s comment that the bank is “ready to do whatever it takes” to save the euro.

But the euro, a deeply flawed financial instrument, will last only if the European Union becomes more like a single, unified country, Krugman argues. And that won’t happen any time soon, if ever.

Krugman compares Spain with Florida to illustrate his point.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

“Both had huge housing bubbles followed by dramatic crashes. But Spain is in crisis in a way Florida isn’t. Why?”

Because Florida residents could still rely on the U.S. federal government to continue to pay Social Security and Medicare, guarantee solvency of banks and provide help to the unemployed, he says. But Spain has none of that.

To solve their predicament, European leaders can decrease borrowing costs of southern European countries or help those countries export their way back to prosperity, Krugman writes. Yet eurozone elite seem reluctant to pursue the first option and completely unwilling to consider the second, which would mean higher inflation in Germany.

Draghi mentions having the central bank buy bonds of southern European countries to bring down their borrowing costs, yet German leaders seem dead set against that proposal.

The euro, Krugman writes, will only be saved if Germany accepts higher inflation, but German officials seem unwilling to even consider that proposal.

“Instead,” he says, “they’re still insisting, despite failure after failure — remember when Ireland was supposedly on the road to rapid recovery? — that everything will be fine if debtors just stick to their austerity programs.”

Even though the euro is defective, it should still be saved, Krugman argues.

“For failure of the euro wouldn’t just cause economic disruption; it would be a giant blow to the wider European project, which has brought peace and democracy to a continent with a tragic history.”

Draghi may understand the eurozone’s options and may understand that the euro is flawed, Krugman notes. The ECB president previously compared the euro to a bumblebee that can no longer fly and must graduate to a real bee.

The ECB is running out of options, according to Reuters, and it will either have to turn to options like buying government bonds that Germans oppose or offering cheap loans that increase its risks.

“It is very uncomfortable for markets knowing there is a risk there is no more they can do if data deteriorates in the next couple of months,” Nomura economist Jens Sondergaard told Reuters.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.


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