Tags: Krugman | Europe | economy | Draghi

Krugman: 'Europe's Economy Wrecked in the Name of Responsibility'

By    |   Friday, 23 January 2015 12:35 PM

Europe's fiscal austerity — and its monetary austerity before 2011 — have put its economy in the tank, says Nobel laureate economist Paul Krugman.

The eurozone economy grew just 0.6 percent annualized in the third quarter.

"Europe's economy was wrecked in the name of responsibility," he writes in The New York Times.

"True, there have been times when being tough meant reducing deficits and resisting the temptation to print money. In a depressed economy, however, a balanced-budget fetish and a hard-money obsession are deeply irresponsible."

Krugman does give credit to European Central Bank (ECB) President Mario Draghi, who took office in 2011. "Mr. Draghi's heroic efforts to provide liquidity to nations facing speculative attack almost surely saved the euro from collapse," the economist writes.

Interestingly enough, Krugman doesn't comment on the ECB's 1.1 trillion euro quantitative easing (QE) program. Perhaps he wrote his column, which appeared in Friday's paper, before the ECB announced its move Thursday.

In any case, Krugman says, "it's not at all clear that he [Draghi] has the tools to fight off the broader deflationary forces set in motion by years of wrongheaded policy."

Many economists, including former Treasury Secretary Larry Summers, have expressed mixed views about the ECB's QE plan.

"I am all for European QE. The risks of doing too little far exceed the risks of doing too much," he said at the World Economic Forum in Davos, Switzerland, according to news reports. "But it would be a mistake to suppose that QE is a panacea in Europe, or that it will be sufficient."

Summers listed three reasons why QE will probably have less impact in Europe than it did in the United States, the Financial Times reports.
  • The Federal Reserve's QE came when bond yields were higher and thus could be pushed down by QE. The 10-year German government bond yield now stands at just 0.42 percent.
  • QE was unexpected in the United States so it was a surprise for the economy.
  • U.S. QE went through capital markets, while Europe's is going through banks, where money flows less freely.
"So, there is every reason to expect QE will be less impactful in Europe," he stated.

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Europe's fiscal austerity — and its monetary austerity before 2011 — have put its economy in the tank, says Nobel laureate economist Paul Krugman.
Krugman, Europe, economy, Draghi
360
2015-35-23
Friday, 23 January 2015 12:35 PM
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