Tags: Krugman | catastrophe | Europe | spain

Krugman: ‘Utter Catastrophe’ Looms for Europe Despite Spanish Bailout

Monday, 11 Jun 2012 02:05 PM

A $125 billion bailout for Spain will recapitalize the country's banks and provide the continent as a whole much needed relief from the market-roiling European debt crisis, but won't steer the continent away from catastrophe around the corner, writes Nobel economist Paul Krugman.

The bailout, arranged by European finance ministers, won't solve Spain's underlying economic problems marked by unemployment rates hovering over 24 percent and an economy mired in recession.

Continued commitment to austerity measures in Spain and elsewhere in Europe could spell disaster for the continent as a whole, Krugman adds.

Editor's Note: The Final Turning Predicted for America. See Proof.

Austerity measures such as tax hikes and wage cuts do more harm than good by wiping out chances for growth in the interest of narrowing deficits, often exacerbating downturns in the process.

"There’s nothing necessarily wrong with this latest bailout (although a lot depends on the details). What’s striking, however, is that even as European leaders were putting together this rescue, they were signaling strongly that they have no intention of changing the policies that have left almost a quarter of Spain’s workers — and more than half its young people — jobless," Krugman writes in his New York Times column.

"Put all of this together and you get a picture of a European policy elite always ready to spring into action to defend the banks, but otherwise completely unwilling to admit that its policies are failing the people the economy is supposed to serve."

Policymakers need to act now to firewall and extinguish the European debt crisis and end its current habit of making decisions to act ahead of collapse.

That means making real reforms to ensure growth and fiscal health before the next problem reaches crisis level and rattles the global economy.

"Whatever the deep roots of this paralysis, it’s becoming increasingly clear that it will take utter catastrophe to get any real policy action that goes beyond bank bailouts. But don’t despair: at the rate things are going, especially in Europe, utter catastrophe may be just around the corner."

Other noted economists point out that austerity measures will backfire if they crimp growth.

"Having firewalls when you're pouring kerosene on the fire is not going to work. You have to actually face the underlying problem, and that is, you're going to have to promote growth," says Joseph Stiglitz, also a Nobel economist and former Clinton adviser, according to Reuters.

"We still have some pretty fundamental problems to solve," says Nicolas Veron, senior fellow at the Bruegel think tank in Brussels, according to the Associated Press.

"We need more radical solutions than this one."

Editor's Note: The Final Turning Predicted for America. See Proof.



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