Tags: Krugman | Europe | Euro

Krugman: Europe Better Off if Euro Collapses Now

By    |   Monday, 24 Oct 2011 01:25 PM

The bitter truth is that the euro increasingly looks like it's doomed, writes economist Paul Krugman. And Europe may actually be better off if it collapses sooner rather than later, Krugman writes in his New York Times column.

To stop the cycle of fear and to halt fears of defaulting becoming a self-fulfilling prophecy, eurozone leaders plan to create an enormous fund to lend money to shaky governments.

The problem, Krugman says, is that some of the governments creating the rescue fund include governments at risk of defaulting. In other words, countries such as Italy hope to lend money to themselves to save themselves.

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Paul Krugman
(Getty Images photo)
Even France, the eurozone's second-largest economy, has been looking shaky recently, Krugman notes. If France contributes to the rescue fund, it will increase its debt and possibly join the growing list of troubled eurozone countries.

"If it weren’t so tragic, the current European crisis would be funny, in a gallows-humor sort of way," Krugman writes.

But none of this had to happen, he says. Countries like Britain, Japan and the United States carry large debts and deficits but can borrow at low interest rates. That's largely because they have their own currencies and investors know they can simply print more money if they get into trouble.

Printing more money does not cause inflation in a depressed economy, Krugman asserts.

"Furthermore," he writes, "Europe actually needs modestly higher overall inflation: too low an overall inflation rate would condemn southern Europe to years of grinding deflation, virtually guaranteeing both continued high unemployment and a string of defaults."

We are told that statutes prevent the European Central Bank taking that route, although clever lawyers might be able to circumvent those rules, he says.

The underlying problem, according to Krugman, is that European leaders created a system designed to prevent a replay of the 1970s, yet the real problem is a replay of the 1930s. They recreated an inflexible system that has turned into a deadly trap just like the rigid gold standard did in the 1930s.

European leaders meeting this week will fail to reach an agreement that will save the euro, predicts columnist Michal Schuman in an article for Time.

"On every major issue Europe's leaders are debating – from the second Greek bailout to recapitalizing the region's enfeebled banks – they are putting their own, narrow political interests over the desperate needs of the monetary union."

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The bitter truth is that the euro increasingly looks like it's doomed, writes economist Paul Krugman. And Europe may actually be better off if it collapses sooner rather than later, Krugman writes in his New York Times column. To stop the cycle of fear and to halt fears...
Krugman,Europe,Euro
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2011-25-24
Monday, 24 Oct 2011 01:25 PM
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