American economist Paul Krugman thinks introducing the euro was a mistake. But he also thinks it needs to be saved.
The current crisis in the eurozone is being driven by heavily indebted Greece, which is spiraling into political and economic chaos caused by a public backlash over government austerity measures. EU and International Monetary Fund (IMF) leaders have demanded the measures in return for bailing the country out.
Fears are rising that Athens is on its way out of the eurozone. Krugman thinks it probably is, and says the consequences would be "ugly."
"It's going to hit the Greek economy pretty hard; there will be some losses on loans to Greece, but those losses are probably going to happen regardless," Krugman says. "And if it's contained, if the Europeans do what's necessary so that it doesn't cause a full breakup of the euro zone, then it's not such a bad thing."
'The Euro Needs To Be Saved'
But that's a big "if," says the winner of the Nobel Prize in economics. Krugman is a strong opponent of austerity measures during economic crisis, which is the path many European leaders are currently on.
Many European citizens agree with him, as evidenced by revolts against budget slashing in the streets and in the voting booth. Voters in France and Greece earlier this month soundly rejected pro-austerity governments.
Now the European Central Bank needs to help out, Krugman says, by becoming an "open-ended lender to banks and governments" and raising its inflation targets as a way to stem the crisis and save the euro.
"I think the euro does need to be saved, if at all possible. But the point is the current policies are not; the current policies are in fact dooming it," Krugman says. "It would be a very bad thing if the euro fails, even though I think it was a mistake. But we made that mistake -- or they made that mistake -- and now you want to save it because a failure of the euro would be very bad for the European project, which is ultimately about peace, prosperity, and democracy -- something that we should all be in favor of maintaining as best we can."
Germany, the undisputed leader of the austerity movement, is having a hard time accepting the shift away from draconian cuts, says Krugman.
At last week's Group of Eight (G8) meeting in Washington, new French President Francois Hollande and U.S. President Barack Obama pressed German Chancellor Angela Merkel to advocate stimulus over austerity and growth over cuts.
To explain how Germany feels about the current crisis, Krugman reaches for a line written by Martin Wolf, the chief economics commentator at the "Financial Times" -- "'In Germany, economics is a branch of moral philosophy.'"
"They have really wanted to see this in terms of sinning debtors, and sin must be followed by a painful redemption," Krugman says. "And the fact that that's not how the economics is working has been very hard for them to accept."
Germany, and the rest of the EU, probably doesn't have long to decide what to do. Krugman says he thinks Greece will be out of the euro within months, and after that, "the moment of truth will come to the rest of the eurozone quite quickly."