Tags: Krugman | Euro | Crisis | Apocalypse

Krugman: Euro Crisis Will Spark Apocalypse Fairly Soon

Friday, 18 May 2012 11:16 AM

Austerity measures won't save Europe but loose monetary policies will, writes Nobel economist Paul Krugman.

The European Union and the International Monetary Fund have made over $170 billion in rescue funding available to Greece provided the country agrees to belt-tightening measures like spending cuts and public-sector layoffs.

The result, the Greek economy remains mired in recession and anger on the rise, as evidenced by recent parliamentary elections that thrust leftist political parties into power vowing to ditch austerity policies even if it means abandoning the currency zone, which could disrupt the European economy if the larger Italy and Spain follow suit.

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

While austerity won't solve the problem, looser monetary policies on the part of the European Central Bank will, Krugman writes is New York Times column.

Inflation may rise, but that's better than risking economic collapse for much of the continent.

"Italy and, in particular, Spain must be offered hope — an economic environment in which they have some reasonable prospect of emerging from austerity and depression. Realistically, the only way to provide such an environment would be for the central bank to drop its obsession with price stability, to accept and indeed encourage several years of 3 percent or 4 percent inflation in Europe (and more than that in Germany)."

The European Central Bank has made low-cost loans available to eurozone banks to ease credit conditions, but has stopped short of more sweeping measures such as direct liquidity injections on fears doing so will pump up inflationary pressures.

That's better than the alternative.

"Failure of the euro would amount to a huge defeat for the broader European project, the attempt to bring peace, prosperity and democracy to a continent with a terrible history," Krugman writes.

"It would also have much the same effect that the failure of austerity is having in Greece, discrediting the political mainstream and empowering extremists."

European officials, meanwhile, are working on a contingency plan should Greece exit the eurozone.

"A year and a half ago there maybe was a risk of a domino effect," says European Union trade commissioner Karel De Gucht, according to Reuters.

"But today there are in the European Central Bank, as well as in the Commission, services working on emergency scenarios if Greece shouldn't make it. A Greek exit does not mean the end of the euro, as some claim."

Editor's Note: I Wish I Were Wrong — Economist Laments Being Right. See Interview.

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