Paul Krugman Is Right Again: It's The Euro Itself That Is The Problem
http://www.forbes.com/sites/timworstall/2015/07/04/paul-krugman-is-right-again-its-the-euro-itself-that-is-the-problem/
Sitting over here in Europe and watching the federasts worrying about whether their darling and delight, the euro, is going to survive the outcome of the Greek crisis is rather disconcerting.
For they’ve still not grasped the basic point at issue here: it is the euro itself that is the problem, nothing else. What moves it all from disconcerting to howlingly frustrating is that they were told this, repeatedly, before the euro started. That for all their joy at ever greater European union they were simply sowing the seeds of the next economic disaster.
And given what has happened in Spain, Ireland, Portugal and Greece in recent years disaster is not too strong a word. This is not our fathers’ recessions, this is much more akin to our grandfathers’ Depression. In fact, outside war or positively malevolent governance (like Mugabe’s Zimbabwe) it’s difficult to think of anywhere that has had an economic disaster to match these past few years in peripheral Europe.
It wasn’t this bad for most of Europe in the Great Depression itself.
Just to go back to basics here. We have both monetary policy and fiscal policy with which we can influence the economy. It’s not quite true but close enough to say that they can substitute for each other (no, let’s no go into the zero lower bound and all that, we’re being very simplistic here). It’s also true that different areas will have different economies. Manhattan’s economy is different from that of Queens, that of New Jersey is more different than that as against that of Louisiana, the economy of Greece is again more different than that from the economy of Germany and so on. The larger the area we consider the more we’re going to have sub-economies within that radically differ.
If things always stayed the same this wouldn’t matter. But they don’t: oil prices change, the weather does, technology changes. Different economies, these sub-economies, will react differently to those external changes (in the jargon, exogenous changes). And that’s fine, we’ve our monetary and fiscal policies with which we can manage them (please note here, I’m including currency exchange rates as monetary policy, which it can be).
And so what happens in Europe, in the eurozone? Well, we’ve got to have just the one interest rate because we’ve got just the one currency, that is, we can’t use monetary policy to help a specific region as we must set it for all. And yet we’ve not got fiscal policy across the entire region either. When the German economy was pretty sick (around 2000 to 2005) we had low interest rates for all because that’s what the largest economy in Europe needed. This set off massive property booms in both Spain and Ireland. And yet there wasn’t any tax collection from those booms which was then sent to Germany, as there would have been with a single fiscal space and policy. Then came the bust and those property booms collapsed: all the Irish and Spanish banks (I exaggerate, but only a little) went bust. By this time Germany was doing fine so interest rates were not reduced to zero: what the peripheral countries needed. But nor was there tax collection in Germany to send to those now poor countries.
= new reply since forum marked as read
