Krugman: ‘Can Europe be saved?’

Paul Krugman has an excellent, major magazine piece at the Times on the prospects for Europe and the euro, as both climb out of crisis, painfully and slowly. Its title is “Can Europe Be Saved?” and the title is apt. The answer is not necessarily Yes.

Almost everyone knows something about the European crisis, but most of us don’t know all of the major pieces. As a result we’re subject to taking off half-cocked (or at least, half-informed) in one direction or another. Or, we subject to being made half-cocked by others with domestic agendas.

The prime candidate for the latter is the shouters from the Right, Middle, and Pretend Left, who scream in unison, “Don’t be like Greece! Deficits will kill you!” You can hear the same group shouting, “Be like Ireland — cut your spending! (And leave those bankers al-o-o-ne!)”

The agenda, of course, is obvious: “We’re the Elite, so you take the hit.” The facts about Europe are against them, but if the facts aren’t obvious, these arguments are hard to counter.

Enter Mr. Krugman, the facts, and his excellent article. It’s all there:

  • The history of the formation of the European Union
  • Its political goals (make the next Franco-German war impossible) and its monetary ones
  • The benefits of having a euro, and the traps
  • How those traps were sprung
  • Why the problem in Greece is different from Ireland, which is different from Latvia, and so on

And finally, what the likely outcomes are. Please do read it. Krugman is always easy, a clear writer, and whether you end up agreeing or disagreeing, you’ll at least come away understanding what he says.

Here’s just a bit from the end, the likely outcomes section. He sees four: “toughing it out; debt restructuring; full Argentina; and revived Europeanism.”

Toughing it out: Troubled European economies could, conceivably, reassure creditors by showing sufficient willingness to endure pain and thereby avoid either default or devaluation. The role models here are the Baltic nations: Estonia, Lithuania and Latvia. These countries are small and poor by European standards; they want very badly to gain the long-term advantages they believe will accrue from joining the euro and becoming part of a greater Europe. … [As a consequence] the Baltics have experienced Depression-level declines in output and employment. … It says something about the current state of Europe that many officials regard the Baltics as a success story. I find myself quoting Tacitus: “They make a desert and call it peace” — or, in this case, adjustment. Still, this is one way the euro zone could survive intact.

Debt restructuring: At the time of writing, Irish 10-year bonds were yielding about 9 percent, while Greek 10-years were yielding 12½ percent. At the same time, German 10-years — which, like Irish and Greek bonds, are denominated in euros — were yielding less than 3 percent. The message from the markets was clear: investors don’t expect Greece and Ireland to pay their debts in full. They are, in other words, expecting some kind of debt restructuring, like the restructuring that reduced Argentina’s debt by two-thirds. … Frankly, I find it hard to see how Greece can avoid a debt restructuring, and Ireland isn’t much better. The real question is whether such restructurings will spread to Spain and — the truly frightening prospect — to Belgium and Italy[.]

Full Argentina: Argentina didn’t simply default on its foreign debt; it also abandoned its link to the dollar, allowing the peso’s value to fall by more than two-thirds. And this devaluation worked: from 2003 onward, Argentina experienced a rapid export-led economic rebound. … As Barry Eichengreen of Berkeley pointed out in an influential 2007 analysis, any euro-zone country that even hinted at leaving the currency would trigger a devastating run on its banks, as depositors rushed to move their funds to safer locales. … But Argentina’s peg to the dollar was also supposed to be irreversible, and for much the same reason. … Nothing like that has happened in Europe — yet. But it’s certainly within the realm of possibility, especially as the pain of austerity and internal devaluation drags on.

Revived Europeanism: In early December, Jean-Claude Juncker, the prime minister of Luxembourg, and Giulio Tremonti, Italy’s finance minister, created a storm with a proposal to create “E-bonds,” which would be issued by a European debt agency at the behest of individual European countries. Since these bonds would be guaranteed by the European Union as a whole, they would offer a way for troubled economies to avoid vicious circles of falling confidence and rising borrowing costs. On the other hand, they would potentially put governments on the hook for one another’s debts — a point that furious German officials were quick to make. The Germans are adamant that Europe must not become a “transfer union,” in which stronger governments and nations routinely provide aid to weaker. … Europe doesn’t seem ready to take even that modest step.

While the Professor doesn’t dig into the politics of all this, those aspects are obvious, and many are ugly.

These include — the orderly fall of governments; the disorderly revolt of the masses at having to paper over the debt of bankers and speculators with their pain; and the continent-wide awareness that it’s the Germans of all people, the perceived Captain Evil of the first half of the 20th century, who appear to be heartlessly profiting.

A bad and bitter soup, but a terrific education and read.


Gaius Publius is a professional writer living on the West Coast of the United States.

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