Krugman’s Frank Eurotalk

Many of you reading this blog must surely also subscribe to, or at least read regularly, Paul Krugman’s NYT blog The Conscience of a Liberal. It admittedly blows this blog away in influence terms, as it is currently ranked #41 on the Technorati list. But is the Nobel prize-winning Princeton economist as ready to bring forward the often piquant opinions resulting from his economic analyses away from home, so to speak, i.e. when on some forum than his own blog?

Of course he is! Lately what has been dominating the economic front has been the Eurozone, especially Greece and Italy. Even when interviewed by a leading German newspaper, Krugman does not hold back, as we can see in the extended interview published on-line by Die Zeit last Friday: “The euro will mutate into an extended Deutschmark”.

Among his remarks:

  • Krugman truly lets his freak flag fly when it comes to the European Central Bank as the only possible savior left for the Eurozone, the only institution left that can save Italy by buying as much of its state debt as necessary to push the interest rate it pays down way below the current ~7%. Yes, that sort of “lender of last resort” function is forbidden to the ECB by treaty; nonetheless, according to Krugman ECB officials should – and will – just say “Let’s forget the rules, we have to buy those [Italian] bonds . . . . Otherwise the whole euro-project fails.” Later, by way of mitigation, he even offers an example of the Bank of England “breaking rules” back in the 19th century – the reference is rather too obscure.
  • The interviewer ventures “But this euro-project was pretty much destined to fail from the start” and Krugman readily agrees, calling it “a horrible mistake,” since “the requirements for a common currency were lacking” from the start.
  • And oh, he later adds, “Greece is simply fundamentally insolvent.” Portugal, too. Probably also Ireland. But not Spain or Italy, actually – huh? You see, fiscally-speaking, Spain and Italy could handle their levels of state debt at interest-rates of around 4%, say, but not at the 6-7% that Italy is currently having to pay for new debt. He calls that a speculative attack, but was probably just using the most readily-available phrase for interview purposes – I wager that that is more accurately characterized, including by Krugman himself, as a self-reinforcing panic-attack (or even “run” on state securities) whereby fears about their solvency causes the interest-rates to rise, which spurs further fears about their solvency, etc.

“So now everything is allowed?” asks the interviewer towards the end, noting that the solutions Krugman is pushing violate the Maastricht Treaty under which the ECB was established. Yes, has to be, he replies: it’s an extreme situation, and as Italy wobbles we are in a decisive phase as to whether the Eurozone holds, or ultimately falls apart with dire consequences.
Die Zeit has quite a few interesting offerings these days on the European Sovereign Debt Crisis, as you might expect. The paper also renders unto Caesar – Prof. Rolf Caesar of Hohenheim University, that is – with his piece Why Greece must give up the euro. The lede:

A euro-exit is the better alternative for Greece. The risks for the rest of the Eurozone are exaggerated.

For many this will actually be a sort of “No sh*t, sherlock!” kind of article – the benefits of a Greece exit sound better the more you hear them although, yes, there will be some chaos – but maybe not for Prof. Caesar’s German audience. He also has a similarly cavalier attitude to rules and formal treaties as Krugman, like towards the fact that no exit from the Eurozone is actually provided for in the protocols: “The relevant currency-union treaties have already been so frightfully abused in so many ways (No-bail-out clause, prohibition of state-financing via the ECB) that one more violation for Greece would de jure be a mere trifle.”

Also in Die Zeit there is Crisis-talk for Dummies, in case you’ve fallen behind a bit on Eurozone developments and need to update your vocabulary. But alas, it is of course in German, although a few of the words (e.g. “Haircut”) are in English.

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