17
Apr

Europe’s Economic Suicide

Written on April 17, 2012 by Ángeles Figueroa-Alcorta in Europe, Globalization & International Trade, Political Economy

By Paul Krugman

On Saturday The Times reported on an apparently growing phenomenon in Europe: “suicide by economic crisis,” people taking their own lives in despair over unemployment and business failure. It was a heartbreaking story. But I’m sure I wasn’t the only reader, especially among economists, wondering if the larger story isn’t so much about individuals as about the apparent determination of European leaders to commit economic suicide for the Continent as a whole.

Just a few months ago I was feeling some hope about Europe. You may recall that late last fall Europe appeared to be on the verge of financial meltdown; but the European Central Bank, Europe’s counterpart to the Fed, came to the Continent’s rescue. It offered Europe’s banks open-ended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and put an end to the panic.

The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.

But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course.

Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.

In a way, it doesn’t really matter how Spain got to this point — but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause. Read more…

As published in www.nytimes.com on April 15, 2012 (a version of this op-ed appeared in print on April 16, 2012, on page A19 of the New York edition with the headline: Europe’s Economic Suicide).

 

Comments

Sarfaraz April 17, 2012 - 5:04 pm

Brilliant article Paul. ECB needs to be more flexible and accept higher inflationary pressures. There will definitely be some chances of recovery.
do read my small piece on causes of eurozone crisis at http://half-bridge.blogspot.com/2012/04/eurozone-debt-crisis-exlpained.html

thanks
Sarfaraz A.K.

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