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Paul Krugman Predicts Greek Euro Exit, But Larger Crisis Averted

American economist Paul Krugman, a recipient of the Nobel Prize in Economics, during a 2011 visit to Yaroslavl, Russia
American economist Paul Krugman, a recipient of the Nobel Prize in Economics, during a 2011 visit to Yaroslavl, Russia
By Heather Maher
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.

FULL TRANSCRIPT of RFE/RL's interview with "New York Times" economic columnist Paul Krugman

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."

Moral Bankruptcy

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."
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by: Mamuka
May 21, 2012 13:40
I keep reading about choosing "growth" over austerity. But the only growth they can really promise is growth in government spending and public debt. Isn't that how Europe (and much of the West) got here in the first place? If this were a viable economic policy, would the Soviet Union not have buried the West decades ago as Khrushchov promised?
In Response

by: Ilya
May 21, 2012 14:57
Mamuka,
you're right. They can borrow and spend to create some temporary economic activity but that doesn't address the debt and bureaucracy problems which got them into this mess. Greece had already been running large deficits to support a bloated public sector before this crisis even started. If government spending drives growth then it should've become one of the richest economies in the EU.
I wish journalists would look at the budget numbers and stop making these nonsensical claims about European austerity. Very few European governments have introduced real cuts to their spending.
http://www.oecd-ilibrary.org/economics/government-final-consumption-expenditure-in-us-dollars-2012-3_govxp-table-2012-3-en
http://cafehayek.com/2012/05/20174.html
Krugman was a good trade economist (and won his Nobel for work in that area) but he's a disaster as a macroeconomist.
In Response

by: Paul from: Ohio
May 22, 2012 00:25
Obama has does a marvelous job of helping the US economy with his profligate spending and is proposing the same path for Europe. I hope they have enough sense to reflect on his abject failures!!!
In Response

by: Ilya
May 22, 2012 08:19
Paul,
Krugman thinks Obama isn't spending enough. Everything would be great if only he'd dig a deeper debt hole. Meanwhile:
http://www.americanthinker.com/blog/2012/05/an_undergraduate_takes-down_paul_krugman.html
In Response

by: William from: Aragon
May 22, 2012 12:06
And people forget too quickly, Ilya, that the US government nearly defaulted on the interest payment on its debt only a few months ago. The US government had to borrow over a trillion dollars from China to hlep pay its interest bill. The US intends to spend this money prudently, by paying some of its interest and announcing the building a ring of military bases to "counter the growth of Chinese power" - I am still having trouble getting my head around this one!
In Response

by: J from: US
May 22, 2012 03:09
You got that right.
In Response

by: Eugenio from: Vienna
May 22, 2012 05:47
Well, Mamuka, actually the thing is that the EU CANNOT guarantee any growth at all. Growth in public spending is NOT AN OPTION any more, given that (most) EU states are so indebted that they can not borrow money on the market at acceptable rates at this point. And even if they manage to borrow - they can not invest this money in the economy, as long as all of it then immediately goes TO PAY OFF THE ALREADY EXISTING DEBT.
In other words, the claim that the process of European integration was going to imply economic growth for its member states has been a LIE. Just look at such countries as ROMANIA that joined in 2007 (and was pormised a ticket to economic paradise), and since the Fall of 2008 is stuck in a severe crisis with salary cuts of up to 25 % (!!!).
And this is why you have the electorates of such countries as Ukraine or Serbia turning their back on the EU: this community of bankrupt states can not offer any perks to anyone any more.
The EU is in the terminal stage of its development and we will see the disintegration of the Euro-zone already after the pre-term parliamentary elections in GREECE next month.
In Response

by: Mark from: New York,NY
May 22, 2012 14:10
Wrong! Keynes advised that governments in a depression should increase debt and run large stimulus programs and that this was the fastest way to end a depression, this government spending actually INCREASES greatly the amount of activity and the size and stops shrinkage of the private economy. Keynes advised ones the depression is over than the government spending could be reduced and the debts paid off. So: in a depression, run large debts, after recovery, pay back debts. You DO NOT cut budgets in a depression and then only increase spending in a bull economy. Cutting government spending in a depresison makes the depression much worse and much deeper and will actually cause the private economy to shrink much more rapidly. There is no natural tendancy to full employment in a market economy, it is possible for economies to never recover from a depression. The solution for free market puritists is to hope that the poor die quickly, which solves unemployment problems. They believe this is acceptable, Keynes and other economists believe this is not. To maintain near full employment and a healthy economy requires constant government intervention into a market economy.
In Response

by: Paul from: Ohio
May 22, 2012 21:59
As mentioned, government spending has really helped us in the US!? I guess what Keynes referred to is "proper" and restrained spending not like the inane spending on questionable projects that is going on with Obama. Obama's advisers are using Keynes as a shield to justify their inept policies. Stop legislating and have the government stay out of the way of the economy and watch it proliferate!
In Response

by: Ilya
May 23, 2012 07:58
The problem with "in a depression, run large debts, after recovery, pay back debts", is that the second half never actually happens, so governments just end up digging deeper and deeper debt holes. Greece and the others were already in deep debt before this crisis started, so they're not in a position to borrow much more. And given a choice between cutting wasteful govt spending and raising taxes on the most productive parts of the economy, it's better to cut.
Keynes is very overrated. Remember the US stagflation of the 1970s? Should've been impossible in a Keynesian world.

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