Dr. Krugman has scoulded the Euro and the financial policy of the Eurozone several times, and keep presenting Spain as a "victim " of the Euro - which underpins perfectly the narrative that Spanish (and Greek) politicians want to push - and I for one truly resent that.
The Spanish housing bubble was not created by the influx of low-interest Euros - it was created by the total failure of the Spanish government, to manage its fiscal and housing policy. Spain is a highly corrupt country, where interests of industrialists and politicians go hand in hand. Total disrespect for building code and zoning Laws was left untouched by local, regional and national authorities and politicians, serving financial and/or political agendas. The big lossers are obviously the spanish people who now pay the price.
Granted, there are less painful ways of dealing with the economic crisis of Spain. But as beating the Germans to a pulp in WW2, was a (US) way to ensure that the germans came out of that war, humiliated and broken. The suffering of the Spanish people serves the same purpose - to remind them that they should never venture down that road again.
The point - and I was explaining this even in 2012-2013 when everyone in the UKUSA was sure about the euro death, is that it was from the beginning a POLITICAL project, not an economical one. The ties that binds us - I shall say we continental europeans - are much stronger than many in the anglosphere believes. I would say, that even many, most in the continent believe.
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Unemployment is seventeen percent in Spain.
Not a recovery or acceptable.
.
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https://www.nytimes.com/2018/02/27/business/italy-economy-election.html
February 27, 2018
Italy Is Having an Election. Most Italians Are Too Depressed to Care.
By PETER S. GOODMAN
TARANTO, Italy — Like millions of young Italians, Elio Vagali confronts career options that range from minimal to nonexistent. At 29, he has cleaned homes, picked tangerines and lifted rocks — nearly always off the books, without the protections of a full-time contract.
In a measure of his desperation, his dream employer is the dilapidated steel mill that dominates life in this fading city on the Ionian Sea. The complex has been blamed for a cancer cluster in the surrounding community. Yet to Mr. Vagali, it beckons like a portal to another life, one that means moving out of his parents’ apartment.
Except the plant isn’t hiring. “You either know somebody, or you don’t get in,” he said bitterly. “There’s nothing here for me.”
All of which helps explain why Mr. Vagali and much of the Italian electorate is either indifferent or contemptuous of the national election campaign that, on March 4, will determine who runs Europe’s fourth-largest economy.
The country’s bleak prospects have improved in recent years, but not enough to meaningfully lift its citizens’ fortunes. Many companies are growing without hiring. What jobs have been created are largely temporary and part time....
Of course, if you showed pre-2008 in the chart you would have Spanish GDP in € much higher than it would have been outside the euro. That said, the "correction" within the euro framework wasn't a given.
Like any Great Change, the Euro was bound to have negative consequences along with its positive displacement of the huge inefficiencies of the previous polyglot of variables, and its constant need to charge fees for currency exchanges for transactions within the EU. Some on those negatives were in play in 2007-12, especially the inability of Greece, Spain, etc., to impose discounted payments by devaluing their local currencies.
What did not accompany the introduction of the Euro was a system for countries in sudden deep recession to obtain the needed structural help from the less vulnerable economies. Instead, led by Germany, what happened was an "I told you so, you naughty children." response which raised their interest rates, deepening the economic damage and the social unrest within the weak economies. The Euro was in place, but responses to a Europe-wide crisis were mostly national and highly varied, with some increasing the damage.
This was both predictable and preventable. By comparison, consider the USA, with its 50 states, but a unified national response to the same severe crisis. Our economic response, particularly that of the Federal Reserve, did not happen by accident. We learned from 1929 and the earlier Panics. Sadly, even we forgot why regulating the banks is such a good idea.
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As an American economist living in Austria, I know exactly what Dr Krugman is talking about and agree with him wholeheartedly. Small, tight, relatively rich modern economies in Europe, like Austria, have not suffered as the Spanish Prisoner has, but under-utilization of capacity and other measures indicating slowness of recovery are obvious to the trained observer.
Analyzing European economies is complicated by the varying involvement of states via subsidies and national regulations beyond the common dictates of EU membership. I've been waiting to see how tenaciously each country uniquely holds on to its own taxation and pension systems in the face of supra-national EU regulation. Consider the ambivalent popularity of the CCCTB:
https://ec.europa.eu/taxation_customs/business/company-tax/common-consol...
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Spain problem is America's problem. Barcelona is a world economic juggernaut and Madrid is Madrid. Inequality is in equality is inequality. In America as in Spain power rests in the hands of people unwilling to enter the 21st century.
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Why no mention of the deficits that would have been paid by the Spanish citizens? Haven’t they been lessened and wouldn’t society any money borrowed once stimulus is enacted?
Explain to me, if the euro is bad for the EU, the is the dollar bad for the USA?
The two situations are about 10,000% different. No explanation is necessary.
The Spanish output gap is indeed enormous, but professor Krugman overstates the effects of the Euro constraints: any alternative policy mix, including a currency depreciation if outside the Euro, would have resulted in an output gap for the Spanish economy. It is of course possible, perhaps likely, that the costs of a deflationary policy are higher than those of a hypothetical inflationary policy (depreciation) because of downward wage and price rigidity....The Euro should only be blamed for the additional costs!
2
Here then we have so often been referred to Keynes in the wake of the recession:
http://krugman.blogs.nytimes.com/2011/08/24/coalmines-and-aliens/
August 24, 2011
Coalmines and Aliens
By Paul Krugman
"If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is. It would, indeed, be more sensible to build houses and the like; but if there are political and practical difficulties in the way of this, the above would be better than nothing." *
* https://www.marxists.org/reference/subject/economics/keynes/general-theo...
This essay is called "wonkish," but as long as a reader can reproduce the models used these essays are clear as the columns. Also, these essays are necessary in going beyond the columns. Heck, we can have fun with FRED.
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I understand the economic argument made. But a point that is overlooked in this argumentation is that Spain (and in fact most of southern Europe) not only saw a rise in real estate prices, but also a huge jump in hourly wages because of the Euro. Which propelled the growth of the economy over all. After many years of continuous deflating their way, Spain became a rich country in real economic terms. But what had fundamentally changed beyond the Euro to support this ? Very little. Isn’t it then only but fair to ask those who benefited most from the upswing also to pay most of the price for the downturn ? And from a political angle, what argumentation can you use towards northern Europe who did not see the same wage effect to pay up for the south just because they can ? Would like to see a little bit more realpolitik from Poul.
"But what had fundamentally changed beyond the Euro to support this ? Very little."
Not true. Unlike other countries in Southern Europe, Spain has a well-developed automotive industry (referenced in this article by Dr. Krugman) and cutting-edge advantages in other areas such as renewable energy.
There is no comparison with Greece or Portugal.
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When will Mr Krugman turn his attack on the dollar zone!
The economy of West Virginia is strangled by being forced to use the dollar. They would benefit from switching to "the clinker" as legal tender so the State can create money at several times the rate the Fed creates dollars.
The South needs to reverse the adoption of the dollar after losing the war in 1865, and return to the Confederate dollar.
California and the rest of former Mexico should be on the peso, not the dollar.
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The US, unlike the EU, has a fiscal union. Thus, money from rich states like CT flows to poor states like WV through federal expenditures on pensions, Medicare/Medicaid, and infrastructure. Money does not similarly flow from Germany to Spain.
To envisage the junk yard where the eurozone will likely end up, all you have to do is cast your gaze on the UK today.
London - immense vital, diverse - but what about the rest of the UK (rUK)?
The UK elite thought they could create a financial services industry in London and use the surpluses to sustain the (neglected) rUK. It hasn't worked, because there simply aren't enough profits for both.
It simultaneously diminishes London's capabilities to build infrastructure, train and educate, do research - in other words, to compete with the rest of the world - while it has proved insufficient to make up losses in the rUK.
The root cause: the rUK can't compete. It can't compete because, with a composite currency (the pound,) all rUK exported products and services are handicapped, while all London exported services are subsidized. (Compare the staggering surpluses Germany has built up - and the staggering debts Spain has also built up - through the very same processes.)
Too, every time the Bank of England sets interest rates, guess what? London's welfare receives preferential consideration, while the rUK's needs are an afterthought. Ditto the ECB vis-à-vis Germany and Spain.
For the UK, the remedy is simple: Instead of tearing itself apart over Brexit: "Londexit": get London out of the pound.
To fix Euroland: either eurexit or a replay of the Philadelphia Constitutional Convention of 1787, which produced the US.
The Dear Professor wraps his hatred of the Euro in economic arguments, but his position is basically an ideological one. He recognised that there were some fundamental problems with the economies of the Southern European countries, but he took the view that they should be fixed later. Now, he says that he underestimated the will of the European elites to stay in the EU despite the crises. However, it was pretty clear then and more so now that it was the populations who wanted to get their houses in order and end the corruption, to the extent possible. They disliked austerity, but they clearly didn't want to return to the good old days, because they knew that only EU discipline would save them.
And, Spain is a wonderful example, although not the one made by the Dear Professor. The autonomous regions were, in large part, massively over indebted and massively corrupt before the crisis. And the state was effectively on the hook for that debt. But for the Euro there was every prospect that the spending would have continued until the country defaulted. The Dear Professor didn't seem to worry about that, because he was quite willing for the countries to default and stiff the creditors. Fortunately, not even the Greeks thought that was a great idea. Darn masses, they just don't know what's good for them!
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Corruption is still rampant in bothe the autonomous regions and in the national government.
Interesting as Dr. K was one of those strongly encouraging countries including Spain and Greece to endure the pain and stay within the Eurozone. Now he stands in astonishment at the ability of elites to endure the real pain for the political positioning.
Eat your cake and have it too, I guess.
Spain's unemployment rate was 8% in 2007 and the latest WEO forecast for 2018 is 16%. So I think Paul K concedes too much when he says Spain "is now more or less back to where it needs to be."
Dr. Krugman, I always thoroughly enjoy your essays, especially your wonkish ones. I learn something every time I read your writings. Thank you.
I noted your comment that Spain's reduction in GDP would have been "like the United States paying $6 trillon towards remaining on the gold standard." That is a drop in the bucket compared to the multi-trillions we have spent on our "war on drugs," for one example. There are many other examples. However, our government, over time, has proven to be a giant, inefficient machine that does one thing and one thing only: make the rich richer. I used to believe in justice. I no longer do, not in the system we have. American justice must be bought and paid for - as in a really expensive high powered defense attorney. Or you better be white and darn lucky you got a good jury!!
The one thing we got going for us is these young people, Dr. Krugman. They are smart, and they are fighters!!
Thank you again. Your intelligence is a welcomed reprieve from What is sorely lacking in the Oval Office and his Administration.
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Once again we are regaled with tales of heroic elites riding to the rescue of a crashed economy. The willingness of political elites to suffer enormous economic pain in order to stay in the monetary union stems not from some fortitude on the part of these elites, as the piece implies, but on the ability of these elites to impose that pain on non elites (workers) in Spain and elsewhere, as Macron (the me or the fascist candidate in the last election) is doing in France.
Very interesting. I wish one day Paul would make a similar assessment of the so-called "Rising Africa" and what that really means.
For example, in my own home region of East Africa, we have the East African Community (EAC) and are discussing a potential single currency and eventual political union. Everything I read about the Euro and EU (through the eyes of Paul Krugman -- since others have differing views) is that it would be a terrible idea.
I'm a little bit of a loss as to whether that would be accurate since the current customs union is working very well and is responsible for the enhanced growth among the member countries of the EAC.
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https://fred.stlouisfed.org/graph/?g=ir0O
August 4, 2014
Real per capita Gross Domestic Product for Germany, Spain and Portugal, 2007-2016
(Percent change)
https://fred.stlouisfed.org/graph/?g=ir0R
August 4, 2014
Real per capita Gross Domestic Product for Germany, Spain and Portugal, 2007-2016
(Indexed to 2007)
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Looking to the per capita GDP data, we can readily understand how much the period of austerity in the wake of recession harmed the Spanish and Portuguese.
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The exact reference link:
http://www.imf.org/external/pubs/ft/weo/2017/02/weodata/weorept.aspx?pr....
October 15, 2017
Real Gross Domestic Product and Output Gap in percent of potential Gross Domestic Product for Spain, 2007-2017
3
"So the politics of the euro have been far more robust than us Anglo-Americans could have imagined."
Maybe more robust than Capitalists could have imagined.
"Capitalism is the astonishing belief that the nastiest motives of the nastiest men (Who comes to mind) somehow will work for the best result in the best of all possible worlds."--attributed the JM Keynes.
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@ Michael
No one ever claimed it was without faults but the fact is that Capitalism does an excellent job of providing at reasonable cost the mass of goods and services that modern mass societies desire and require. No superior alternative has been found. The only one that has been tried turned into the greatest political, economic and social disaster in history. Perhaps you'd like to tell us what your alternative is? I also doubt the quote came from Keynes who was both a capitalist himself and a firm believer in its efficacy.
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The first time that I read this quote attributed to Keynes (and some places on the internet attribute it to Keynes), I thought that it was very negative toward capitalism. But after thinking about it, it seems to complement capitalism. Here is a system that takes the selfishness and nastiness of people and makes an economic system work.
This quote is a restatement of a quote from Adam Smith -- "In spite of this natural selfishness and rapacity," business people "are led by an invisible hand ........that without intending it, without knowing it, advances the interest of society." In another place Smith says "the butcher does not provide our dinner because he is a great humanitarian but because it benefits himself."
Capitalism is just a system. All of the participants are free to pursue their self interest (which most people pursue anyway). Most business people are honest and moderate in their pursuit of wealth; but there are always some who will try to game any system.
cute headline (even Dr. Krugman's reflexive '(Wonkish)'), inspired to write a play with that as a title
Congratulations on your selection as the keynote speaker. It is recognition of your incisive thinking on the role of monetary policy in continuing the prosperity and quality of life in a highly interdependent World community.
You did not reveal all of the discussion at the Forum, so forgive me if I mention a critical issue which the regulators of monetary policy should be giving thought to what seems to be given short shrift in economic policy discussions: transitioning away from fossil energy sources.
The challenge is enormous in every dimension, social, political, and economic. The leadership to recognize this challenge and move the world to action must come soon because civilization is at stake.
Reflecting on your last column the "brutish" quote from Thomas Hobbes fits the situation if our leaders don't mobilize a portion of the World's wealth to meet this challenge.
I am optimistic that collectively, humanity can do it because I have worked in energy R&D and know the scope of the challenge and understand what we can do. It will take persons of your stature and communications skill to wake the public and our leaders to the urgency of this issue and bring attention to solutions. Alas, T**** doesn't appear to understand or see the opportunity in taking up this challenge.
James Powell, the inventor of superconducting Maglev and I write about potential technologies. We recently made available "7 Big Projects" as a companion to "Silent Earth" on Amazon.
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What about Greece?
2
This idiot now understands a fundamental nature of human beings : affinity breeds super human power. ‘We’ are totally different from ‘I’ and ‘you.’ Time makes fermentation which shallow mind of even the best economist might never understand properly. Euro is being fermented to We-ro.
By the way, Anglo-Americans do not exist in the real world. It exists in the fantasy world of some anachronistic stupids who are 1000% more racially biased than Trump.
Twitter: President Pelosi... your lips to God's ear.
i actually opened that thread. Curly & praying kitty were worth it.
Egads! So many of these comments, like Krugman's column itself, are so obtusely the position of our global elite, mostly men of white male privilege opining from on high as to what the little people should do and endure so the 1% and their toadies can carry on!
Wake up people! Trump, Brexit, Le Pen, the rise of nationalism across Europe are all the alarm bells of people rising up against the new world order that has left millions behind and worse off then they've been in decades! Like Weimar Germany, we are on the cusp of a renewed fascism. Staying the course of ivory tower, model UN nonsense like some sort of symposium is not the answer in the face of the existential threats that are Russia and, more scary, China.
3
Apropos the last sentence: Oh my, a glaring syntax error in the good grey lady.
2
Spain has been headed socioeconomically downhill ever since the beginning of the Spanish Inquisition and the loss of the Spanish Armada in the wake of the Spanish colonial conquest of the Americas and the Caribbean. Spain reached it's low during the fascist regime of General Francisco Franco as it's colonial empire built on genocidal exploitation of Natives and theft of Native land and resources collapsed.
2
we Anglo-Americans, not us......
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"So the politics of the euro have been far more robust than us Anglo-Americans could have imagined.”
Make that, “than we Anglo-Americans could have imagined.”
2
The good professor is one of my favorite columnists. I look at the NYT columnists because I like to learn new things and see things from a different point of view; in particular, I like to read what the professor has to say about economics in this country and world wide. It is good to see a column that doesn't mention the narcissist-in-chief. It is easy to spend a lot of time talking about him but it distracts us from more important and interesting issues.
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My non-wonkish reaction:
I like Europe. I buy shares of European companies whenever I am able to. They have been around longer than most American companies, have weathered many crises, generally take decent care of their shareholders and employees and on the whole exhibit a better sense of social responsibility than their American counterparts. Best of all, they tend not to exhibit the fast buck artistry I see in so many American CEO's who. when I see them on television, always cause me to place my hand over my wallet.
3
Spain also benefits somewhat by being the world's number one tourist destination after the U.S. fell off the top with Trump's election (sorry to mention Trump) and the numerous advisories on travel to the U.S. due to gun violence which can be found on websites of many governments around the world.
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I think you need to stop calling these kinds of columns wonkish. They are actually very educational and illustrative for those of us without formal economic training.
2
“So the politics of the euro have been far more robust than us Anglo-Americans could have imagined.”
Don’t know much ‘bout economics, but I do know when to use “us” and when to use “we”.
2
The professor makes the human mistake of simplifying multiple events to only those that feed his story line. He forgets that the EU funds & the Euro helped fuel Spain’s tremendous infrastructure growth in roads, rails, airports, production facilities. This growth obviously resulted in greater internal consumer demand & prosperity which combined with the increase in truism & EU purchases of secondary homes on the Spanish coasts (Spain is the “Florida” of EU retirees}, yes this all led to housing bubble. The good professor assumes that if Spain had exited the Euro, well a very sharp devaluation would have led to a quicker recovery, but at what cost: greater unemployment, reduced pensions, elimination of the social net that made its recovery less painful? The demise of the Euro has been greatly exaggerated.
5
EU members may use the same money but their militaries are not unified.
The Euro hasn't seemed to change political disputes or nationalist feelings.
Perhaps money is not the root of all evil.
2
Sorry, Professor Krugman, but by choosing Spain as an example of "in the long run..." you provide us with your usual obtuse dissembling. Why not take off the rose colored glasses and turn your gaze on the ongoing economic disaster that is Greece, the equivalent of Spain by a factor of times four or five?
Greece, for the good of its people, should have exited the euro years ago when its economy collapsed. But, such a move would have likely led to the demise of the monetary union so it wasn't allowed to happen.
In the long run, the euro will fail or shrink to a core constituency of the fiscally responsible such as Germany, Benelux and the Nordic nations. Not France, not Italy and none of the other southern and eastern European members. I predict this will be by 2023.
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You choose to ignore the effect of Spain's Bankia IPO and its nationalisation.
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"Spain in effect spent years as the economic prisoner of the single currency..."
And Greece is still under the jail.
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Brexiting Britain's "Have Cake Eat It Too" planners ‘solved’ their commerce dilemma to maintain VIRTUAL CONJOINMENT as "Cabinet ministers agreed Thursday on an approach of "managed divergence" by which Britain would take control of its own regulations but maintain the standards required by the EU in certain key areas to protect trade and jobs."
https://www.cnn.com/2018/02/24/europe/eu-brexit-tusk-uk-intl/index.html
“David Davis, secretary of state for exiting the EU, described what Britain aspired to as "a race to the top in global standards". “ Riiight, I'm sure that a country escaping .. to gain competitive advantage .. is planning on complying.
Virtual conjoinment will lead to the EU REPRIMANDING the new non-member into using its new "managed divergence" stick on domestic industries. WHAT IF the actual wording is ineffective at binding its domestic industries to EU standards. Brexited Britain won’t re-write / enforce, then what EU? Continue imports?
Brexiting Britain has found a corner to paint itself into. When it gets there, it believes that the EU will be inept at addressing 'allegations' from continental competitive forces, effectively maintaining its "Live, and Let Live" corner.
The politics in the member countries will resolve the matter, regardless of EU's explanations. What populist wedge can grievances create? What are the real stakes of virtual conjoinment?
Hi:
Just thought that you show have some social context for my previous thought on this subject. I'm the son of a lead navigator in a B24 bomber who was shot down over Germany in Aug/1944. I never knew my father, but was raised by my mother who fought the good fight to make sure that her son received all the benefits he deserved for his father's actions. At this point, I, and most of my aged friends are horrified by a man that we've been calling "Our American Quisling." He's not looking after our interests, or our children's interest, but rather, the interests of a fascist regime in Russia! I probably won't see the end of this fight, but my 10 grandchildren will! And, I hope they're better off in the future for any small thing I can do in their future honor. And, one more thing "the emperor has no clothes!"
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If I may be totally unwonkish. I just read this in the Toronto Star.
In line with my responses to your recent op-eds this is where Finland and Canada and other democracies are now in 21st century welfare reform.
This is not A Modest Proposal for Preventing the Children of Poor People from Being a Burden on their Parent or Country and Making Them Beneficial to the Public.
https://www.thestar.com/news/gta/2018/02/24/from-barely-surviving-to-thr...
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Therefore, does the Euro represent the shared defense of the nations against a foreign aggressor such as Russia? I don't know, but there sure seems to be something in the background that makes the weaker nations stay onboard.
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I think it's fair to surmise that if Spain had retained the Peseta, the Spanish could have done a better job of containing the economic damage of the Great Recession. In the US, the Fed responded with QE, greatly helping the recovery. The ECB was extremely slow to follow that path and also hindered by objections from the German government.
1
why is the US $ trading at $1=.81 euros?...... a 20% difference is too big to ignore, can someone explain why isn't our $ stronger against the euro?...
"Shout 'Viva Espana' and die like a Patriot!" A studied opinion would be that Spain, like all other members, is lucky to be so involved, as you point out when you say it is just where it should be.
Spain paid a terrible price to remain in the Eurozone. Young Spaniards were particularly hard hit and are still suffering high rates of unemployment. But the cost of being part of a greater Europe seem to have been worth the hardship. Spain is a solid member of the EU. An integral player in the Continent's continuing prosperity and progressive democratic development. Portugal and Ireland also paid their dues. During the recession, they were ridiculed as PIGS and "peripheral" but no one can deny then full membership today. The European experiment hit a real speed bump but it seems to be on course, at least on the Iberian Peninsula.
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I already wrote a similar comment to a similar article of yours. It is not just the elites in Europe that wants the euro, you underestimate the “dream” of the United EU. Even here in Italy almost no one seriously want to go out of the euro. The eu is not just an elite project, it is not just an economic project.
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PK: Did you really write "more robust than us Anglo-Americans could have imagined," rather than "we Anglo-Americans"?
That Spain toughed it out does not mean Spain *should* have toughed it out. Prof. Krugman has pointed before to Iceland, which gave the Austerians the heave-ho. Spain and Greece should have done likewise. It won't be long before they're in the same crucible again.
Would it not be more important to compare Spain's bubble, with our bubble? We didn't have to endure the pain Spain did, and one asks why, as our bubble was substantially larger than their bubble? We moved out faster to normalcy because we have the Feds with their separate balance sheet. So $trillions of fake dollars went to our economy, of course we are now starting to pay for that fake economy, very slowly though. But my point is probably is it time for Europe to set up their "fed balance sheet" so when the time comes they can create a false economy as well. It will be interesting if PK will be able to compare who really won out, naturally after the U.S. returns to a normal market economy, pays back it debt, if that is possible.
Your question is an interesting one. In Ireland we had a similar dynamic to the Spanish property bubble. Banks (many of them German by the way) gambled recklessly in these peripheral economies where we hoovered up the cheap money at interest rates more appropriate to the strong centre economies (Germany France UK) . The ECB, with hawkish leadership from JC Trichet (strongly backed by Dutch/ German/ Austrian /Finnish central bankers) finally gave way to the more expansionist Mario Draghi whose QE finally loosened up the markets. But it was carnage here for a while. People lost businesses and many families lost fathers to suicide. I still don't know whether the counter cyclical nature of economies in the centre and periphery make currency union untenable in the long term. I think it could work if we ensure that private capital is made to bear the full loss of its risk rather than putting the losses on the people ie."burn the bond holders ". But politics were not on our side. The German (and other) banks were not keen to crystallise their losses and this was not entertained by the Troike of ECB, IMF, EC. The fundamental problem is that we have a moral hazard where Banks & institutional Investors believe they can invest and if the potential loss is big enough and therefore "systemic" that sovereign Govts (that you and me by the way) will be made to pay for their recklessness. And sure ins't that a great way to do capitalism - privatise the profits and socialise the losses ?
Remember Krugman predicting a stock market crash and global recession after Trump win? So much for Krugman's credibility. I wonder how many fools got out of the market based on the Krugman prophecy?
Is the problem the Euro or the lack of an EU income tax the problem? How willing would Michigan be to vote on bonds to bail out Alabama?
If separate currencies are the key to (comparatively) painless adjustment of prices (by changing exchange rates), how separate should they be? Should each province of Spain have its own currency? Each American state?
I'm glad to see that Krugman can do something other than grinding out partisan hack columns.
When the East-Germans in the aftermath of the Polish revolution and Glasnost teared down the Berlin Wall the historic moment started my carrier as a cameraman capturing these glorious days for international TV-Stations. For all of us at that time Europe became a new meaning.
In order to unite the continent and 'fix' which has been broken, never been working in the past, a plan had to be made meeting the interests of the then founding European states. The goal: nothing less than continent-building, a concept the US know well and follow since day one on a national level.
For that, of course, was the abolition of dem Deutsche Mark, the de-facto European currency of the western after-war Europe, inevitable. The big flaw of the Deutsche Mark from French, Italian, Dutch, Austrian, Spanish etc.. perspective was, well, its German name and control.
In exchange for reunification Germany had to let the DM go. The first Euro banker was French, of course and the Euro became the Deutsche Franc, what else?
One cannot look at the Euro from a monetary point of view. It's the blood in Europe's veins. What is the Dollar for the US?
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A few years ago Krugman was forecasting the demise of the Euro. Now this has been downgraded to the economics are bad but it's been saved by politics. His second claim alas is no more accurate than his first. We all know that the Euro has certain theoretical problems which largely come down to convergence and this is going to be very difficult to achieve. However, it was not politics but economics which held the Eurozone together because even with its shortcomings the Euro offers major benefits to both the wealthier Northern European economies and also to weaker Southern ones. It certainly wasn't politics that kept Spain and Greece in the Euro it was economic imperatives. If politics had been the determinant both would have left years ago.
The Spanish slump was not because of the Euro, it was because they had a huge cheap credit based real estate bust which threatened the banking system which had be rescued. Does this sound familiar. Doesn't Krugman regularly produce charts showing the theoretical loss of US output because of the failure to institute massive fiscal stimulus in 2008 to 2012? It's essentially the same phenomenon that occurred in the US but Spain's economy was weaker and took longer to recover.
The Euro incidentally remains the world's second reserve currency; is used by about 350 people daily; has appreciated against sterling and dollar; and the loss of its clearing business is causing some heartburn in Brexit Britain.
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Well, Krugman, how can we swing a massive infrastructure project in every state? Or do readers know that the Republicans quashed it when it would have been cheapest, easiest, and most productive economically? Just because they wanted to dis Obama.
It appears to me that we have to move forward. I traveled to Vancouver Canada last year. The moment I crossed the border I saw superior everything everywhere. Roads, bridges, buildings, it looks like we should have started twenty years ago.
7
I was born in Feb., '43. 'Google' the state of Europe then. As a young JFK said when he saw it in '45--total devastation. Look at it now. The EU is a great idea and I don't see how it works without a unified currency. The Euro ain't perfect but I say let's give the currency and the EU credit for what's been achieved thus far. Compared to what it was in '43, it's a miracle.
4
What you omit mentioning is the debt jubilee at the end of World War II. This made both the German and Japanese economic miracles possible. The loss of monetary sovereignty implied by the euro did not.
If you compare the financial crisis that Iceland faced vs Greece, you can easily see that Iceland was infinitely better positioned to recover than Greece, Iceland has its own currency and federal reserve / central bank and thus could control their recovery which enables them to recover much more quickly than Greece, who faced severe austerity measures imposed on Greece by Angela Merkel, who was doing the bidding for the Frankfurt banks. Greece is still having a hard recovery, how can you recover with such severe austerity?
This could serve as a lesson learned for Spain - Spain and the other Mediterranean countries are not in the same straits as Greece, but certainly are not doing as well as Germany, either. They would be doing better with their own currency, which they could control, instead of the chain around the neck that the Euro has become for countries like Greece and Spain.
2
@Philly Expat
Why do people keep invoking ridiculous comparisons between Iceland and Greece? Iceland has a population of 320,000 and essentially functions as a hedge fund with a fishing subsidiary. After widespread fraud at their banks they defaulted on debts to mainly British investors which the British government then had to cover on a promise they would be reimbursed by Iceland a promise that seems unlikely to kept.
And if the Euro is a chain around their neck would you like to explain why Greece and Spain are so determined to remain members of the Eurozone?
4
Why do people keep misrepresenting what Krugman has said? Your earlier comment "The Spanish slump was not because of the Euro" comes from either a lack of understanding or a straw man argument. Krugman has never blamed the Euro for the slump. He has blamed the tight money monetary policies for hindering the recovery.
2
@rls
Illinois
Do you have comprehension problems sir ? I suggest you re-read paragraphs 2 and 3 because you clearly did not understand them since Krugman clearly uses Spain as an example of the Euro's failure because to quote him it "is in some ways at the heart of the Euro story."
1
At some point it would be interesting to add a crypto currency to this analysis. With a crypto, Spain could adhere to the Euro for international trade but usd a fluctuating currency for domestic chores. That’s what was missing in 2008-2017 and Spain was forced to use the same currency for both needs. Inserting a crypto currency would be like having a domestic currency and a separate reserve currency.
1
@DenisPombriant
Boston
Apart from the fact that crypto currencies are a massive fraud. As if there weren't enough already in 2008 Spain.
2
Having suffering through this painful process of readjustment between vis-a-vis northern European nations, what is next for these economies and the Euro, Mr. Krugman?
Are such distortions among the economies of Europe less likely as the European project of economic integration and the use of the Euro continues, or is such a boom-bust cycle likely to repeat? In other words, is it probable that there is greater convergence among the economies of the Euro nations, so that relative economic growth and inflation are more uniform across the Eurozone in the future?
1
I have lost count of the number of obituaries for the Euro that I have read. One of the first out of the blocks was Sir Alan Walters, Margaret Thatcher's favorite economist, who gave the Euro six months. That was nearly 20 years ago.
Looked at from the perspective of economics, Dr. Krugman is correct. A single currency without a single financial/fiscal system does not make sense and past experiments with such currencies have collapsed. This may still happen to the Euro in the long run. But as has often been pointed out, the Euro is first and foremost a political project, not an economic one. As long as the political will to support it remains, so will the currency.
Meanwhile, for those of us who travel a lot in the Eurozone and who remember the bad old days with wallets and money belts full of multiple currencies, it is a Godsend.
9
A rather selfish one, considering the suffering involved.
The tough times of the recession in Spain were indeed difficult. There were people jumping from their balconies to their death as the authorities were pounding on their front doors to repossess their defaulted property. Family dogs were abandoned on the traffic circle below us. One time, when I got on my high horse and lectured a local about Spanish abandoned dogs, I will never forget how utterly chastised I was when the Spaniard looked at me and replied: "what would you do when the choice is to feed your children or your dogs". Bitter times of massive unemployment and economic disaster that would have been called a depression in most other countries.
But, as pointed out, the Spanish commitment to the EU is extremely strong. The EU investments in fantastic Autovías, as one example, opened up this area. What used to be a two hour drive to Malaga now takes 45 minutes, and that fast and smooth Autovía runs to Barcelona and beyond to the north. The EU paid for most of the costs, as for other major infrastructure investments. English, the modern lingua franca of Europe, is more widely taught and generally now from a young age. Cheap air fares bring in the European vacationers but also allow for many Spanish to vacation in other parts of Europe.
Less isolated, more integrated, perceiving the long-term value of the EU, the Spanish seem prepared to work hard to succeed as Europeans. Support for the Euro versus a return to the Peseta is a part of that commitment to a unified Europe.
12
Someone a couple of weeks ago provided health and other statistics showing how much better off Spaniards are during prolonged recessions than Americans, and he had a fair point – I mean, he provided enough data to convince me that the average Spaniard's plight is far less pitiable than that of working Americans. I understand about not wanting pity, particularly from people in a country that elected Trump, yet he was really only kidding himself by measuring Spain's economy with that yardstick.
Why are people everywhere always making excuses for poor governance and defending the status quo, just as if they couldn't imagine how things could possibly be any better? Rather than engaging in pissing matches about how relatively well-off they are, people should aspire to make life as good as it can be, and they should focus on whether they are living up to their own potential. With that, I'll just go back to dreaming of how much better life in the US is going to be once Republicans are driven out of office en masse, as I am guardedly optimistic that they will be come November.
20
"the willingness of political elites to suffer enormous economic pain in order to stay in the monetary union."
Once again, it was not just the political elites who chose to stay in the euro, but the people. The people, from Greece to Spain to Italy to France, like the euro. They vote for politicians who support the euro, and vote against those who don't (see France's Le Pen). This is now - what? - ten years, and Mr. Krugman still doesn't understand this basic fact.
You understand whether a newspaper can be trusted when it reports on a local issue that you know about. If it reports on it accurately, then you give it trust, otherwise not. Because Mr. Krugman is and has been willfully writing inaccuracies for now ten years on Europe, I can only suppose he does the same for American issues, and is therefore not to be trusted on anything.
8
Bear in mind the EU is not a country, it does not have a single government with the European Commission functioning more as a civil service. Real decisions are taken when national government leaders come together at summits and the rules dictate they must usually reach unanimous agreement.
One might wonder how well the US economy would have fared had any significant intervention depended on unanimity between the nation's 50 governors.
The fact is; Europe is trying something that has never been done anywhere on Earth in all of human history. It is an experiment to unite peoples in a peaceful fashion. Slowly, incrementally, carefully.
Yes, they made some grave economic mistakes along the way. But the flaws of the Eurozone will be addressed.
The Europeans are dedicated to this project. You would be too if your continent was still littered with war graves that stretch to the horizon and remnants of concentration camps. There isn't a town in Europe that isn't missing some of its finest architecture because it got obliterated by bombs.
Anglo-Americans underestimate how deep the scars of war really run in Europe.
32
Interesting column, as always. But the excessive burden imposed to Spain, Greece and a few other countries in the eurozone resulted from bad political decisions from the EU rather than a structural flaw of the euro. The shortcomings of the monetary integration are real but do they outweight its advantages? Namely: Would German reunification have been politically possible without the decision to create the euro? If so, would the EU have survived it? How would small EU countries have coped with the 2008 banking crisis without the shield of the euro?
12
It seems like the euro is a halfway currency. The individual governments still control their own spending plans, and their taxation rates. Since both have direct influence on the relative value of a currency, how does the value of the euro stay stablized when Germany is more responsible than Greece? Having the euro controlled by the ECB while being unable to centrally manage spending and taxation seems an ultimately unworkable combination. Dr. K, I'd love a column on thoughts about this...
3
Those Euro-zone countries with a tradition and desire for democracy (Western Europe) should embark on full fiscal/political union. Those of Eastern Europe that traditionally prefer autocracy - much (not all) of the former Soviet sphere - should be excluded.
2
"Anyway, one of the issues that came up was the recovery in Europe, which is real and in some ways a bigger story for the world economy than the continuation of the Obama expansion here"
"Obama expansion?"
Yes, in fact it was Mr. Obama who gave us Trump and the tax reform bill. You may not be aware but Mr. Obama knew that Mr. Trump would be good for America and worked behind the scenes to elect Mr. Trump.
A fantasy? No more fantastic that yours except that I offering mine tongue in cheek and YOUR tongue is elsewhere.
3
“Obama recovery” is shorthand for the recovery that started under Obama and continued under Trump. Would you like to rename it? Or do you want to provide evidence against the recovery that we have all been talking about?
3
I was merely protesting against Krugman's tendency to pretend that everything bad comes from the Republicans and everything good comes from the Democrats.
It would be great if the world was quite so simple. But it is not.
But how does that help us? In America the economic elites have been making out like bandits for over 30 years due to tax break after tax break. The 99% are at a point where the loss of a job, a breadwinner, the need for extended medical care, or a small monetary emergency can put them in financial hell. So please explain how this is relevant to our situation.
16
Two observations are in order.
1. Even in the bonanza years, let´s say the decade prior to the catastrophic recession of 2008, Spain´s rate of unemployment was roughly double the euro area´s average. That remains the case today.
2. Traditionally, the Spanish economy has generated relatively little industrial capital. That too remains the case today.
2 is one of the prime causes of 1 and has been for a long time.
13
that is just completely false. are you a troll?
I am curious how the "political elites" suffered. Did they have to make decisions about how to feed themselves and their families? Did they have to move. because they lost their homes. Did they end up living in a homeless shelter?
Obviously the only people who matter in Europe and America are the "political elites" . Wow Mr. Krugman.
7
Stop putting your own selective context around an observation made by Dr. Krugman. He isn't suggesting the elites have been hurt in the same way as the non-elites have during the recession. He is saying that remaining in the single market has led to several nations undertaking economic costs they might not have been exposed to ad they not been part of the Euro. These economic costs opened ruling European parties up to easy (and often persuasive to the electorate) critiques from those out of power. That's a political cost the current governments have paid for remaining in the EU.
In no way is he suggesting "only the elites matter." He's talking about the observed outcome of the political calculus conducted by the ruling parties of Germany, France, Italy, Greece, and many others, that it was worth taking the hits to stay in the EU.
36
Why does the EU need the common currency? I can see the benefits of European stability and peaceful economic integration, but is the common currency a requirement for these. Dr. Krugman's arguments against the common currency remain valid, I think, namely that without a willingness of a central bank to bail out the weak economies in bad times, the common currency just piles on the pain. So where is the benefit?
4
I think that the common currency is a check on irresponsible lending by the banks. If productive nations can preserve the purchasing power of the Euro, then banks cannot base their lending on expected inflation (at least not rationally). Irresponsible lending inevitably results in a misallocation of capital. If I buy inflating real estate instead making a capital investment in productive facilities, I damage my society. The principle "In bad times, buy good assets" has been vindicated by the success of Quantitative Easing. It should have been followed in Spain and Greece.
"...economics of the euro have been as bad as critics warned...Spain in effect spent years as the economic prisoner of the single currency, and the fact that it eventually received parole doesn’t change that fact...however, Spain stayed the course, paid the price, and is now more or less back to where it needs to be. So the politics of the euro have been far more robust than us Anglo-Americans could have imagined...
Aaah, professor - if only your economic theory was all Greek to me
https://krugman.blogs.nytimes.com/2012/06/17/long-run-greek-competitiven...
"...Yes, Greece was poor and relatively unproductive. But its famous lack of competitiveness is a recent development, caused by massive post-euro inflows of capital that raised costs and prices. And that’s the kind of thing that currency devaluations can cure...
Fast forward, to next Greek parole hearing
https://krugman.blogs.nytimes.com/2017/04/11/europe-has-problems-but-le-...
"...These costs might nonetheless be worth bearing under extreme circumstances, such as those facing Greece: a severely depressed economy that needs a radical reduction in costs relative to its trading partners might find even a costly euro exit followed by devaluation preferable to years of grinding deflation...
Sounds like you're advocating a jailbreak, vs doing the time
Less seriously, you've stayed deliberately way off on the multiplier effect of manufacturing jobs vs - say - opioid recovery counselor jobs
4
Yes the productivity of those 30-50% of young people who were unemployed for years will never be recovered. That is the tragedy of allowing the economy to get into a severe recession - not just in Spain but anywhere and regardless of the reason for the downturn (or for letting it fester).
17
I see nothing to celebrate here, Paul. 50% unemployment is a terrible price to pay for – eventual - recovery.
And “Spain” didn't pay it. Its workers did. The rich sailed through it all quite comfortably as they always do. And so did the foreign owners of its low labor rate factories (e.g., GM's auto plants).
Didn't Keynes teach us a better way to deal with depressions? Instead of just waiting around till labor becomes cheap enough to make investment profitable again, didn't he say government must step up to provide the investment needed to pull the economy out of its rut? And wasn't that also the idea of the New Deal? And of Obama's emergency stimulus program (don't remember its precise name) in 2010? The latter, as you yourself said, was too smal but even that did some good and was a heck of a lot better than just waiting around for the rich to take pity on us and restart the economy. Which was, as you describe it, what happened in Spain.
Isn't there a better way?
16
In economics, especially when looking at measures as blunt as GDP or aggregate unemployment, one must be careful not to apply the remedy that one model prescribes for another, distinct ailment. While government spending can be a wonderful boost to jump-start ailing demand, it does little to help if he root cause of the troubles are things like structural labor market frictions.
Not all periods of depressed output can be cured with more government spending- and we must be careful to recognize when it is, and may not be, appropriate as the central policy.
Spain was prohibited from taking the Keynesian way, precisely because of its membership in the Euro: Unable to devalue, and unable to finance fiscal stimulus through deficits - because no one would buy debt from a sinking ship of state. Until Draghi pronounced the magic words, "Whatever it takes," government bonds from the peripheral members were unsaleable - e.g., all the Spanish and Greek domestic funds that might have been invested in Spanish and Greek government bonds (thus permitting the governments to finance Keynesian programs), went to German bonds for reasons of safety.
There was also the baleful influence of the Lisbon Treaty, under which no nation is allowed to run an annual deficit of more than 3% - disastrously insufficient in such circumstances.
In effect, Spain was bound in chains of Euros.
Furthermore, Spain still labors under a load of unresolved debt. So, the real point, in my opinion, is what will Spain do the NEXT time? The French and Germans are STILL squabbling over how to proceed. Time is running out. Having experienced one such event, how much pain will Spaniards be willing to suffer - ALL OVER AGAIN - because nothing has been fixed!!!!
2
The Euro was only one of the missteps taken in the wake of the fall of the Soviet empire and the reunification of Germany. The inclusion of impoverished and xenophobic former Soviet satellite states in the European Union shocked the manufacturing industry in Western Europe and resulted in massive unemployment and economic migration. The Shengen treaty opened internal European borders even though the EU had no control of its external borders-- resulting in a slow but inexorable invasion of Europe by poor young males from Africa and the Middle East. And, of course, regulatory overreach and centralization of power in Brussels has resulted in a revival ethnic populism from Scotland to Catalonia. Messy as it is, elites will probably continue this bumpy journey to a united Europe over time. Americans can't appreciate the awful European memory of more than a century of war, revolt, tyranny and bloodshed which powers the impulse to peaceful unification.
3
Can you give us an example of "regulatory overreach" from Brussels? Who cares if all the toasters sold in the EU have to reach the same standard? Also, Scotland wants to stay in the EU, it's England and Wales that want to leave.
1
O my God, the Professor is showing traces of humility. Or is he? In any case a good sign.
But the bigger point is the price paid by Spain: unemployment around 20 %, tens of thousands if not hundreds of thousand who emigrated, the low salaries, and as a direct consequence of the lack of prosperity, Catalan secessionism, based on the false premise that because they were the richest province they would do better without the rest of Spain, failing to realize that it was due to the contribution of the rest of Spain in labor and market access that they were prospering in the first place, plus help from Madrid of about one hundred billion euros..
It is not a coincidence that the new news about recovery were accompanied by an 8 points drop in the polls for the plan of secession.
12
I was in Catalunya during the recession. Most of my spouse’s friends lost their jobs. Her father lost his business. Globalization for Spain (I.e. the Euro) meant German conglomerates undercutting mom and pop shops across Spain.
Think again before criticizing the Catalans. It speaks volumes more about the failures of the central government’s handling of all of Spain’s citizens’ liberty and political fate. Make no mistake Catalan politicians are imprisoned solely on their cultural beliefs. Yes, it is about money. The money “owed” to Germany under austerity measures. The lenders stay mum concerning political abuse when they just want their cash. Rajoy is an incompetent tool of Merkel. Spain is a mess that cannot be described solely with numbers.
I don’t have much faith in the Euro helping the interests of Southern Europe. Spain, Italy and Greece are disasters. The economists look at numbers but the people actually feel them. And, these regional disputes are not going away. They are growing.
1
A large and stable Euro bloc is important because the world needs a reserve currency and "safe haven" other than the U.S. dollar. Even the U.S. needs relief from the distortions caused by its role as a supercurrency power. My two cents anyway.
14
Agreed or, better, banks should and seemingly are aiming at flexible/ fixed exchange rates - The Euro should be about $1.10, the Yen 100/$1, the pound about 1.25. The value of these currencies should revolve around these rates preserved by interest rates and reserve requirements.
Whereas Spain, the country, may be back to where it needs to be, I doubt the citizens are after such a long period of no income.
So what is the preferable alternative to the way the EU handled the situation during the extended recession? If you had been "King of Europe", what steps would you have taken that would have involved less pain but still gotten them back to health?
1
You might want to actually visit Spain & see the crowded restaurants-on weekends with large families of several generations, during the week by businessmen & women. Spain is a happy country.
1
"...the recovery in Europe, which is real and in some ways a bigger story for the world economy than the continuation of the Obama expansion here."
Especially since the "Obama expansion" is an illusion for all but the top 10% of earners. For millennials, the current era should be called the Clinton/Bush/Obama nightmare.
3
I call it the Greenspan nightmare.
1
Clinton/Bush/Obama/Trump nightmare.
1
Why was Jill Stein at the RT able twixt Flynn and Putain, please?
The emotional pain is clearly visible. A step back to normalcy would be to have columns like this one without any reference to any Mr. T... Thank you.
Three points about the Euro in Spain:
1) When considering the euro, a sensible approach would be to consider its benefits for the Spanish economy. With the euro, Spanish businesses and travelers easily transact with the rest of the EU. Given that the EU's economy is greater than US economy, billions are saved from currency conversion costs alone.
2) Internal devaluation was needed in Spain as the productivity was (and still is) under the EU average.
3) The housing bubble was created partly by a the lower interests the Euro brought to Spain. More importantly, lax banking regulation allowed subprime mortgages for everyone. Shady corporation with no credit history, no securities and no deposits were given extraordinary amounts for constructions. In few famous cases, the amounts loaned were in the 100s of millions. Same applied for the Average Jose. He would easily buy a projected apartment with a 110% mortgage with no deposit. The projected apartment would be sold 2-3 before completion with a profit. It was a classic irrational exuberance... Had Spanish banks been regulated properly any would have required deposits and securities before handing out loans, the bubble wouldn't have develop the way it did. I would recommend Mr. Krugman to visit Spain and learn how its people and businesses relate to Euro...
Editor’s note: This comment has been anonymized in accordance with applicable law(s).
11
Even if I have a lot of respect for Paul Krugman, and I find him to be personally likable, I believe that he is wrong about the Euro. There are aspects of the Euro that he is failing to take into consideration. If nothing else it serves as a good “storer of value” that causes people work harder and save more than they would if they had little confidence in the long term value of their daily use currency. But there are other things too.
Professor Krugman would do better to wonder more if he is wrong about the Euro, instead of trying to come up with reasoning that suggests he was right.
But Paul Krugman is not a bad guy, and I respect him.
5
Presumably the single currency in the US has a similar effect such that some states suffer at times when their economies are out of step with the overall economy.
1
Hi:
Is there enough data to show how projected inflation in the US over the next 10 years subtracts from the projected growth under the Trump Tax Cut over the next 10 year? I've been call Trump "Our American Quisling" for a couple of weeks now based on the likely availability of information like this that can be made available to the American public. And, at the same time, show how the Republican sympathetic vibration to the Trump Tax cut will worsen the lot of the middle class and below in the US, basically dramatically reduce (what was an expanding safety net) services available to the middle class and below!
5
The Euro is fundamentally political, a statement to the world. Politics trumps economics.
5
"...the willingness of political elites to [allow the working class to] suffer enormous economic pain in order to stay in the monetary union" -P. Krugman
There, fixed it. Dr. Krugman appears to imply that political elites suffer economic pain. No, it's the working class, poor and elderly that suffer that pain. One would never miss this point if one had a class analysis where society is composed of the working class and capitalist class. However, Dr. Krugman's neoclassical chimera is just composed of economic agents and firms. It makes it easy to ignore real flesh and blood suffering. In fact that's the point of that abstraction from reality.
It should be unnecessary to reiterate this point to a Nobel prize winner.
46
stewarjt, your observation is brilliant and needs to be more widely understood both by economists and by lay persons. To generalize from it, practically all economists have an irresistible urge to consider an average effect and not its distribution over the affected population. Typically, they do not state that they are equating the distribution with its average. For example, Paul Krugman said only "economic pain" and not average economic pain. I regard this as a flaw in economic thinking that has huge practical consequences.
5
Recall Junker's statement in support of the very deflationary policies that PK condemns: "We all know what to do,we just don’t know how to get re-elected after we’ve done it." Recipe for disaster.
"So the politics of the euro have been far more robust than us Anglo-Americans could have imagined."
Maybe it's time to imagine more positive outcomes. There's always luck. Sometimes it's good. Unintended consequences aren't always negative.
3
So the Neoclassical Synthesis worked as advertised. The economy self-heals as wages and prices fell, but without government help, it heals slowly. In the U.S., we will now get a test of the opposite proposition, if the government pushes the economy above full employment, wages and prices will rise, forcing an increase in interest rates and a decline in GDP.
4
As I have tried to point out earlier, it would be instructive to review the course of the US dollar in its first decades. As I understand it, it had a rough ride in its first decades. There were several alternative currencies available in the late 18th and early 19th centuries.
And, what enormous "opportunity losses" did the dollar users of the day suffer compared to each state, or each economic region, having their own currency!
9
According to one scholar, the US did not actually qualify as an Optimal Currency Zone until as late as the 1930's.
Professor Krugman, I think I understand the comparability between the gold standard and an 'alien' determinant of monetary policy such as the Euro, incidentally for all the member states. However, the point remains that currency mergers have been successful in the past under such circumstances, for example the Mark, which was created to serve a number of separate economies. Specifically with regard to Spain's situation, back in the days of the peseta, no one could afford to borrow, because the interest rate was too volatile. Then suddenly in 1999, credit was available at an attractive rate, and the rate was almost certain to remain stable. Further, there was no currency risk across Europe. If you made better than the interest rate on your assets, you had to borrow; so borrow they did. Whatever the science, that was going to end in tears, but life with the Euro is beter than with the peseta, which is a good reason to stick with it.
8
I've always thought that economically (but certainly not politically), the EU at the outset needed a "northern Euro" and a "southern Euro" (where the latter would tend to devalue slowly and fitfully against the former) but it would have been incredibly rude and impossible to organize things that way. I'm not sure that Germany in 1990, or the US at various points in time, was an optimal currency area either, but somehow it worked.
6
We should be happy. Europe, the source even today of most of our citizens, has engaged in wars through history even into the 1990s. In the Euro Zone that's stopped. Dr. Krugman I am a wonk too. Just curious to know if the 'saved' costs of wars are in the calculations.
36
I am not Wonkish never will be. But I do understand stability.
When ever in modern times was it better provided than by the US Dollar, The UK Pound. and..the Euorpean Euro? I might give way to the Roman currency, but that is it. Let us not destroy what helps to keep us on an even keel. We need that more than ever.
6
Yes, politics, but also very much Draghi. The "do whatever it takes" mantra kept interest rates in the negative zone where they needed to be to get the modest recovery going. But signals are growing that the punchbowl will soon lose its punch and liquidity provision pared back. That may be appropriate on average if inflation approaches its target, but for Italy and Spain where inflation is 0.8% and 0.6%, respectively and falling, this is certain to add more pain to their long-suffering citizens. With the UK out of the zone and national fervor on the rise in the core, moving out will be far from simple as well. Much more worrying would be the likely impact of stagnation on their nonperforming debt-burdened banks. What good to meet your target if it blows a financial hole right through the center of your zone? And Draghi's term is up in 18 months. Be sure that the long-stifled German hard money types are drooling to take back their lost authority, and stand ready to demonstrate the power of Schumpeterian creative destruction once again.
2
Isn’t this simply an example of an inherent failure in democracy’s inability to constrain politicians’ promises within realistic economic limits? Whether the inevitable reconciliation takes place via money illusion (devaluation) or some external constraint (Euro, gold...) is less significant than the structural flaw intinsic to our democratic systems.
1
Having lived in Europe 1994-2005 (the Netherlands, but worked in almost all Euro countries plus the UK, Sweden, Denmark, and Switzerland), I saw the political cohesiveness of the Euro (plus the menace when the Euro was threatened). The relative cost of living in Member States was reflected in different prices for the same goods depending on where one lived (that might well be simple supply and demand). The the feeling of community was tangible. And much as I almost always agree with your positions, Prof. Krugman, I disagreed with on this instance.
Side note: Johnny One Note Commenter (aka Richard Luettgen) demonstrates once again his ignorance when he wrote: "the lack of a common history, work effort, language, and political priorities – even basic values" of European Union Member States. They have more of a common history, dedication to work and especially the role of work vs. the other aspects of human life, the desire to work with different languages instead of enforcing a one-tongue-fits-all, and a political priority that is inclusive (well-maybe that is suffering as some demagogues assume power).
34
It was 1953 when I first visited Europe to attend high school in Athens, Greece. I had visited Spain and Italy on the way with our trip paid for by the US Government as my father was on assignment for AID (Agency for International Development). I remember the austere conditions of that time, people barely getting by, struggling with the effects of WW II, rebuilding and restoring their cities and countryside. It was a magical time for Americans, however, as our dollar was worth a small fortune as compared to local currencies.
I have returned to Europe many times since those days, and rejoice at how
modern and user friendly each country has become. Not only have they surpassed the USA in their infrastructure improvements, they provide excellent healthcare, education, work and retirement programs.
I'm afraid the USA has gone in the opposite direction. The American dollar has dropped many times in its value, our infrastructure is crumbling in some places resembling a war torn society, and a healthcare-education-work-retirement segment that favors the rich and powerful over the hard working Middle Class and Poor.
We have gone in opposite directions as the USA focuses on war and the military, producing weapons of mass destruction for the citizenship, and a heathcare, education and retirement system that gets worse each year.
I applaud Europe for their accomplishments since WW II. They have exceeded all of my expectations.
238
Excellent read. Thank you.
Spain did not participate in WWII. So maybe what you saw in 1953 was Spain struggling to recover from its Civil War, while living under a brutal military dictatorship.
@David Michael--- Yes, as you say, what a contrast with our past, where once we led the 1st world, but now we lag. Your observations of Europe today are a topic ignored by Times columnists and other media. We need these comparisons.
Let’s add – EU strong gun safety laws are supported even by their conservative parties. Their citizens have a greater chance of living out their life span than Americans---due to few shootings, and health care for all.
EU nations don’t let corporate wealth finance their elections. This frees up their politicians to try to represent the interests of average citizens. They ban the privately paid campaign ads that swamp our media, so their election costs are a fraction of ours.
Employee unions are weakened here, but supported abroad.
Our GINI index ranking of economic equality/mobility is now lower than many modern nations.
EU nations don’t have Fox News type media monopolies dominating their politics. Their politicians don’t cultivate voter distrust of their own govt. They don’t let religion influence politics like here.
The US, once a world role model, is now a warning how a democracy can go downhill. And then a Trump can step in and exploit.
2
My reasons for doubting the strategic viability of both the euro AND the greater community were NOT wonkish. They had to do, certainly, with Paul’s doubts about the inability of a country to devalue a national currency to regain competitiveness likely with a lot less pain than Spain had to suffer, but it also had to do with the lack of a common history, work effort, language, and political priorities – even basic values. However, they may have partially solved the problem of a lack of a common language by their general adoption of English across the community as a lingua franca – even among the French, for heaven’s sake. The community may survive after all, although they may need to develop a taste for bangers and mash.
However, it remains exceptionally vulnerable to the kinds of economic upheavals that saw Spain bleed so badly for so long. If bubbles appear in any of the nations, the pain that Spain endured at their burstings will need to be repeated to recover. Spain had the fortitude to do it; but would others? And nobody yet has solved Greece – their jobless rate among the young, while marginally improving, is still over 40%, while the average EU rate is about 16%.
This all remains a work in progress, and nobody can really predict its likely outcomes.
4
Dick,
Would you rather be broke in Greece or in New Jersey?
There are some fine articles discussing the Greek dilemma, soaring cost of debt, austerity, mean Germans, IMF bail-outs, broken promises, crisis in Turkey, Cyprus, and the Greek way of life.
2
winchestereast:
Oh, I'd much rather be broke in New Jersey. I've been to Greece but my Greek is primitive at best and I'm not into heavily spiced foods.
1
Too bad Spain and others did not fully realize the value of its natural assets - great weather and 'distance'. I debated the location of Euro Disney with a logistics 'expert'. He claimed that Paris was a terrible spot. People were used to driving to such an amusement and returning to their home in a single day. Obviously, Disney should have located more centrally in the general area of Belgium - that favorite German pathway to France. Clearly a good idea for goods.
But, I disagreed when it came to fun. Disney should have picked Spain. Better weather. More important, people are used to making Spain a vacation destination. You don't plan to drive there and back in a day taking in Tomorrow-land en route. You go to stay for a while. Too bad Spain did not recruit Disney and similar feature attractions to bolster its natural calling - a wonderful place to catch some rays.
9
Europe would do well without Disney.
I suggest you take it to Wichita or to Mar-a-Lago, as a Florida complement to Orlando.
Mr Stroud: What you hadn't noticed 'way back then was that Francisco Franco had just packed it in in 1975, the Tinajero dust-up was in 1981 -- by which time Euro Disney plans had to have been well under way. No planner in their right mind would've proposed anywhere in Spain in those years.
https://es.wikipedia.org/wiki/Anexo:Cronolog%C3%ADa_de_Espa%C3%B1a#Trans...
The Spain you thought you knew never existed.
1
It would be useful for Prof. Krugman to expand this discussion to include the whole debt cycle since adoption of the euro -- exaggerated expansion followed by exaggerated contraction, and to include the role of any procyclical fiscal policy, which he has emphasized in other cases.
Also, it's still not clear what his recommendation is, in terms of constructive steps for the future.
5
Thanks, PK, for this small contribution: the "cumulative loss of output" is a measure that I seldom see in newspaper reporting about the cost of a recession. It's a good one, potentially translatable into permanently lost income for people--something that a reader can quickly grasp.
10
Yes, it is both lost income and lost wealth -- past income saved. It is difficult to reach the same level of income after losing years in which to grow to it, but even more difficult to build up the wealth never produced in the lost years.
5
"The continuation of the Obama expansion" is a notion that we have been educated by America's relentless spleen-spinners to forget, if we ever understood it in the first place despite eight uninterrupted years of empirical evidence. Even more forgotten are the data of the preceding eight years of maladministration that drove the country over an economic cliff in the first place.
Oh well, we are only getting what we asked for, I mean as a collective body politic. I certainly didn't ask for it and if you're bothering to read this, you probably didn't either.
71
This is written as if the expansion applied to all Americans in all regions. It did not. Vast numbers were left out. That is what the spleen-spinners remember.
4
Dr Krugman - a natural question (at least to me) is why do European elites “pay the price” to remain in the currency union given the high costs?
5
If some behavior looks irrational from an economics standpoint, you should seek its explanation outside the economic box.
4
As I once heard someone in Europe say: They got tired of seeing their grandchildren swinging from lamp posts every 20 years or so.
Political and economic elites suffered nothing. They were willing to force others to suffer and take credit for it themselves.
22
You obviously like that idea better than, for instance, the one that they favor the European project. Time will tell.
1
The political costs of Euro-zone-mandated austerity policies, in terms of disillusionment with the EU itself, are still being felt. Don't underestimate them as one source of the anti-Brussels furor now sweeping the continent.
3
One wonders what our world would look like if we did not have borders at all ( a devastating human construct in the abstract and in the literal senses ) ?
The bankers and the financial powers that be can manipulate currencies within respective ''boxes'' while successive governments beg and plead with financial caveats to return to some modicum of balance.
Wonkish indeed ...
6
It may be that the political damage was less than feared because the level of wealth is higher today than it was in the 1930s. People suffered, but few had their physical survival in doubt, so the actual amount of human suffering on the ground was much less than in the 1930s. It also probably helped that fascism and communism are so thoroughly discredited today, in a way that they were not in the days before they achieved actual power and brought disaster on the nations they controlled.
11
It's just another case of globalist elites pursuing their agenda, regardless of how normal people suffer. They don't care because for them everything is working out just fine. Spain was never given a choice by Merkel and her accomplices in the European power centers.
5
Nobody is surprised that the European Union -- the eurozone, really -- has survived the chaos of the economic crisis, which resulted from U.S. banking standards. Europeans believe in the EU and they believe int he euro -- the only thing worse than keeping the euro would be getting rid of the euro.
I'm disappointed liberal U.S. "wonks" consistently critique the euro as flawed and consistently argue that the EU is perpetually in "crisis." I think I understand the reason they do this, though -- it's a psychological coping mechanism, because they don't want to admit the 21st Century is the European Century, and that the European Union's strong liberal values and respect for human rights -- its world-leading social prosperity -- far surpass anything achieved by the USA.
In short, many U.S. liberals are incredibly jealous of Europe's safety, security, prosperity, sustainability -- I could go on... -- and therefore would, to some degree, like to see the EU fail, at least in contrast to the USA. But it's not going to fail, because it's a strong and noble project with the support of Europeans.
35
James, I join you. I think Dr K is getting our message. Reread his closing sentence. More from PK on this would be appreciated.
1
James, thanks.
What we don't get from our columnists is that unlike the US, the EU nations don't turn over their elections to wealthy mega donors. Thus, for 1 thing, they've had universal lower cost health care for generations that we still lack in 21st C.
Our columnists avoid even talking about public election financing, limiting private money, or reversing Citizens United. What’s normal abroad is off the table here.
EU nations aren’t burdened by our biggest campaign expense---ads that swamp media and manipulate voters, that need billionaire funding and raise media profits.
Campaign Advertising---Per Wikipedia ---
“In the EU, many countries don’t permit paid-for TV or radio ads for fear wealthy groups will gain control of airtime, making fair play impossible and distorting the political debate in the process.”
Imagine---distorting the political debate! A fear well founded, per our example to the world. While the rw in some EU elections have gained, they didn’t take over. Here the rw GOP dominate our 3 branches.
Yet most Americans in both parties deplore big money in politics, while our media ignores it. Columnists stay safe, lamenting our policies, but not tracing causes.
They’d rather criticize the EU for any faults they can find. They don't want to appear too ‘anti corporate’, just humanitarian. Just bash the Trump. And avoid talking about the low US ranking among countries in the GINI Index of economic equality. Just write wonkish—more prestige.
1
Re: the 21st Century is European. Not at all. Birthrates have been so low for so long that drastic population collapse in now unavoidable. Unlike America, Europe's immigrants don't get absorbed culturally or economically in these homogeneous nations. One after another, each EU nation is seeing a rise of ultra-nationalist, right-wing movements. Asia is already far more important, and Europe is approaching irrelevance economically. I note you didn't attempt to dispute Krugman's critique of Germany's imposition of austerity was on the mark. Lastly, the EU has confused its free-trade zone with global free trade; instead, Europe has become one of the most protectionist zones, subsidizing its woefully inefficient ag sector as well as many other industries.
"Spain stayed the course, paid the price, and is now more or less back to where it needs to be."
It's remarkable just how casually economists dismiss the suffering inflicted on millions of real people by flawed economic theories.
Youth unemployment in Spain has been lowered to around 37% from 56% in 2013, when it was "paying the price". If the positive trend continues, pretty soon it will only be twice what it was in 2007. In the meantime, an entire generation has been lost.
But the good news is that Spain is "back where it needs to be".
The Euro was the biggest failed socioeconomic experiment since Communism.
The only question now is whether the collapse of the EU will be the end of the Euro, or vice versa.
And the "politics of the Euro" are not “robust” in any remote sense of the word, in fact they are literally tearing Europe apart as we speak.
Neither the EU nor the Euro zone will exist in five years; ten years on the outside.
Discuss.
8
"In the long run, then, the Spanish economy is not dead"
Clever.
Little known fact: what Keynes actually said was "In the long run, no one expects the Spanish inquisition"
12
In other words "you shall not crucify mankind upon a cross of... euros?"
6
Many who have been vociferous in criticizing income and wealth inequality such as Paul Krugman have not pointed to the increase income inequality as the cause of the depression. Those on the left who might be the natural proponents of a more progressive tax system have not connected the dots. They have a different theory as to the cause of the depression. They are adherents to the regulatory fallacy, the belief that the depression was caused by insufficient regulation.
To determine if someone is an adherent of the regulatory fallacy ask this question: Do you believe that given the degree that the tax burden was shifted from the rich to the middle class, was there any type of regulatory policy which would have prevented the financial crisis? If they answer yes, they are adherents to the regulatory fallacy
In Paul Krugman’s 2012 book “End this Depression Now!” he comes heartbreakingly close to connecting the dots between the reduction in the progressivity of the tax system and the cycle of overinvestment that caused the depression. He states that the book is much less concerned with the cause of the depression than what should be done to end it.
Those on the right have their own version of the regulatory fallacy. They blame FNMA and the Community Reinvestment Act. According to their theory, regulation such as the Community Reinvestment Act resulted in a vast increase in subprime mortgage lending that caused the financial crisis.."
http://seekingalpha.com/article/1543642
1
While the income inequality was a contributing cause to the Great Recession, it is also greatly worsened by the methods chosen to deal with that crisis. We are now worse off than ever.
6
If you believe in the "cycle of overinvestment" or any mechanical and thus unavoidable financial movements, how can there be hope of escape? We're just sitting here watching the wheels go round and round, as John Lennon sang.
I am trying to be sympathetic, Buford, though what you're doing is to justify Das Trump.
Dr Krugman,
Spain is simply another example of the disaster that befell all western democracies when Nixon put an end to Bretton Woods. The inequality gap is probably the central reason the the richest most powerful nation on Earth is now exhibiting death throes but Spain must deal with Fascist early 20th century ill equipped Madrid and 21st century rich vibrant eager to get on with Barcelona.
With America 83% urban wealthy Democratic and productive and producing 87% of GDP growth the government is in the hands of early 20th century oligarchs and kleptocrats like the Kochs and scam artists who know how to manipulate the media and their justifiably frightened pawns.
That is the lesson of Spain and is the lesson for America.
Do you want to be Barcelona or Madrid and just like America the familiarity of a hierarchical backward looking Madrid is winning out over a Barcelona that is anxious to help shape the world's future.
America can stick its finger in the dike just so long and every day new cracks develop. We are waiting for the USA to stop the breach and if America doesn't find some kind of fix it will be Finland, Germany or Switzerland or some other still sane nation that finds a way to fix the widening gap between rich and poor.
Arkansas cannot lead California into the political, social and economic future.
21
Menphrie, I think you do not know how selfish are the catalan elites. Due to the failed independentism, Barcelona is becoming more and more ugly . Madrid is way more open and inclusive, I would move there if I could.
You have to love the phrase "paid the price". Take a good look at Spanish society today, and the effects on ordinary people, and then try to rejoice.
"Us Anglo-Americans" are in no position to comment, coming as most of us do, including Dr. Krugman, from ignorance.
"Robust", indeed -- the chart says so! This is why the economics' profession is widely and justly despised.
3
Hard to comprehend this. A European context is missing here, since only 10% of the EU citizens live in Spain. This beautiful and pleasant country (where I have been living for 6 years now) received about € 15 billion dollars yearly over the past 2 1/2 decades from EU funds. I enjoy their first grade roads, tunnels, airports and other infrastructural works, as well as the fruits of their agriculture. Both strongly financed by these funds.
The Spanish people work quite hard, as far as I can see, but would they have had an advantage by being outside the Euro? Maybe, but then the real economic earners of the EU (Germany, Belgium, Netherlands, UK) would have started to doubt their investments in the southern (and eastern) countries.
21
Spain went through the necessary labour market reforms that all euro countries need or needed to go through, with e.g. France being in the process of it now. This is an important aspect in making euro countries economically more compatible with each other and also the price for continuing an open trade policy with the world (recently adding Canada and Japan to the list). I think it's important to see the big picture here: Spain was a developing country after the Franco years, and its EU membership since 1986, with a massive investment influx that followed, lifted the country up to where it is today. People have not forgotten this and were prepared to endure some hardship to stick with the core euro/EU countries.
13
Labor market reforms seem to mean making labor pay for the crisis caused by wealth, and from which wealth profits. Increased inequality of economic outcomes and increased insecurity are real problems to vast numbers of people, and do also limit demand to as to restrain recovery.
11
Mark I don’t disagree, but EU governments have not relentlessly gone after the unions like in the US so there was room for reasonable concessions during and after the crisis. Now times are good, unions in the EU are negotiating wage increases and even working hour improvements as IG Metall representing 2 million workers proved a few weeks ago.
4
Dr. K., you bring up an important aspect of recovery that is too often forgotten over on this side of The Pond - the output gap - that measurement of what should have been if financial disruption of one sort or another had not occurred.
An economic measurement which takes on even more social significance in a country if financial disruption was caused by chicanery/mismanagement.
To us, it is important to see how this gap is measured in the lives of ordinary citizens, which can be quantified, since as previously discussed:
http://www.nytimes.com/2013/07/20/business/recent-graduates-lose-out-to-...
new graduates who enter the job market during a recession never really make up the difference in their lifetime earnings, as shown by Lisa Kahn of Yale University:
https://www.theatlantic.com/magazine/archive/2010/03/how-a-new-jobless-e...
It will be interesting to see how these diminished effects in citizens' lives express themselves in Europe's political future, as well as the U.S.'s political future.
15
Hey R Law,
Wouldn’t the debt burden been imposed had we enacted stimulus? Could this be just as detrimental?
Paul Krugman needs to share with us his analysis of why the international value of the dollar is falling instead of rising sharply in response to the tax cut, as he predicted.
The dollar is weak along with Treasury paper probably because markets see the Fed behind the curve in raising the Fed Funds rate, and actually following a policy
which raises inflation risks.
That would explain the rise in interest rates and fall in the dollar.
get ready for a credit crunch in the future.
5
Tax cuts add $ to the economy. When supply is increased prices fall.
"an emotional vacation. What I mean by that was that I got to have an extended policy discussion without once mentioning the name T****."
I'd ask Krugman to take such emotional vacation much more often. We need and I value his policy insights.
We don't need and I am bored by his contributions to the game of over the top Trump hate, who can say the most radical things.
Policy could also contribute much more to getting rid of Trump and all his support than could merely calling names at Trump and all his voters.
"the willingness of political elites to suffer enormous economic pain in order to stay in the monetary union"
Which elites suffered enormous pain? None. Germany stood against paying. The Greek elite put the pain on everyone else in Greece except themselves. That is the pattern.
Spain is the same. Its pain was unemployment and loss of homes to foreclosure, and private assets wiped out. The elite suffered none of that pain, their assets were rescued and they were never unemployed or without their (very large) incomes.
Krugman is better than this neo-liberal view of events in Europe. Get back to work.
53
That's funny. I was just thinking that we don't need and I am bored by those who see fit to issue Paul Krugman marching orders.
Beyond the plain old effrontery, it occurs that it's probably a Good Idea to have outlined as much as possible of the ways Trump's trashing our economic future.
10
Agreed: "elites" and "pain" only occur in an accurate sentence when linked by the verb "cause".
1
I suppose that if we Americans had endured several deadly wars last century, including Spain’s horrible civil war, we might understand Europeans’ willingness to suffer economic pain to save the EU. Not just the Spanish; think of the Greeks. Not that the EU doesn’t have its enemies — the right wing Hungarians and Poles, and the truly awful Brexiteers. But the great majority of Europeans know where nationalistic folly leads. Americans are having their noses rubbed in it again, under he who must not be named.
163
Every Euro sceptic should take Mr. Archer's comment to heart.
5
Devaluation is hardly painless, especially if there really is a lot of international trade, which was the whole point of the Union. As Krugman said at the time, it may just be less likely than internal devaluation to cause rioting in the streets. As it happened there was little rioting even in Greece. There would have been loss of output whatever course Spain followed, although other countries could have effectively donated some of theirs to Spain (which is what happens in the US) - that is fiscal union would have improved things for the weak countries (as Krugman has always said).
If the euro had not existed there is no guarantee whatsoever that monetary authorities would have followed the course that Krugman recommended. The national Maestros are not likely to be wiser (or more in agreement with Krugman) than those of the ECB. Have the Fed and the US government followed the optimal monetary policy for international trade?
7
On the contrary. Give the guy a break. He needs some time to talk about stuff that nobody really knows anything about, manly because it doesn't really mean anything, so he can to the wonkish thing. Who ever started calling "economics" science anyway? How did that happen?
On the other hand, Paul's insights regarding the real world are worth reading because they are coming from his heart which understands Human beings rather than from his mind which is excellent at processing data, but lousy at understanding concepts like compassion and truth.
3
The "politics" of the Euro.
Dear Mr. Krugman, I deeply admire and appreciate your contribution to journalism.
In response to your article on Paroling of the Spanish Prisoner, I would like to say that I fully agree with your "negative" assessment on the impact of the Euro on most countries, except for one, of course, Germany, which has reaped most the wealth that left, or did not get produced in, the other euro countries.
I beg to differ though on the nature of the glue that has kept the euro together against this economic catastrophy. The glue is not the "politics" of the euro but the "economics" of the single currency, which subsequently dictates the politics of each euro country.
The economics of the euro relates to its design that has deprived each euro country the parallel existence of its national currency, making it a huge economic and logistic catastrophy to exit the Euro for any of these euro countries.
I call this reality in my articles, the Eurotrap, because this is exactly what it is. It is a trap based primarily on the financial level, and secondarily, on the economic level.
When the UK is having such a difficult time in extricating itself from the EU, even though it has a robust economy and a strong national currency, you can imagine how difficult, almost impossible, it is for most of the euro countries, with weakened economies, high debts and no national currencies to leave the euro. This, of course, is fully exploited by Germany to dominate the Eurozone.
26
I guess I am too dense to understand this. Krugman says,"During the good years money poured into Spain, fueling a huge housing bubble. This fed inflation that made Spanish industry uncompetitive, leading to a huge trade deficit." What did this have to do with the euro?
And suppose we drew that chart for the US. Would it look much better?
I agree that austerity after 2008 forced by Germany hurt Spain's recovery, but I can't see how the euro facilitated Span's fall. After all, we had control of our own currency, but our own austerity from 1996 to 2008 when the federal deficit was less than the trade deficit and money flowed OUT of the private sector seems like the cause for our collapse, and our collapse had an influence on all of Europe including Spain.
Furthermore, we had control of our currency, but from 2009 to 2017 our own version of austerity when the deficit was cut 75% caused our recovery to be glacial. While Spain's recovery was more painful, when I read this column, I thought of glass houses and stones.
16
Much of the money that poured in was foreigners buying vacation homes on the coasts. When the trouble hit, they defaulted, and being outside Spain they were able to walk away without much penalty. Vast developments went half finished and abandoned.
That wiped out both Spanish banks that had helped fund the vacation homes, and Spanish workers who had built them, and the Spanish communities for which they were key income. Until the foreign defaults, Spain's banks and government debt were in very good shape.
Spain's troubles came from outside, and then the outside forced Spain to eat the costs of what outsiders had done to them.
36
Mark, I pretty much agree, but you left out that these developments (which also included resorts and airports, etc.) were also funded by foreign (i.e. German) banks. Rather than just letting the firms default, Germany forced the Spanish government to make good the loans. This did not help Spain one bit.
48
Joining the euro really did make borrowers in Spain more credit-worthy, by greatly reducing exchange risk. Interest rates fell, even though there was still some, although reduced, exchange risk vis-à-vis the USD, GBP, etc.
As always, credit markets overreacted and lent too much, eventually generating a debt crisis and a recession.
Formerly, this would have produced a currency crisis too. Prof. Krugman believes that this would have been beneficial.
In any case, with the euro the movements in nominal exchange rates that would otherwise have confused/exacerbated/helped (take your pick) were mostly absent. The euro itself didn't move much against the USD or GBP.
4