Can Europe save itself?:
Europe’s Great Illusion, by Paul Krugman, Commentary, NY Times: Over the past few months I’ve read a number of optimistic assessments of the prospects for Europe. Oddly, however, none of these assessments argue that Europe’s German-dictated formula of redemption through suffering has any chance of working. Instead, the case for optimism is that ... a breakup of the euro ... would be a disaster for everyone, including the Germans, and that in the end this prospect will induce European leaders to do whatever it takes to save the situation.
I hope this argument is right. But every time I read an article along these lines, I find myself thinking ... disaster, no matter how obvious, is no guarantee that nations will do what it takes... And this is especially true when pride and prejudice make leaders unwilling to see what should be obvious.
Which brings me back to Europe’s still extremely dire economic situation. ... European leaders committed themselves to ... the notion that fiscal austerity and “internal devaluation” (basically, wage cuts) would solve the problems... Meanwhile the euro’s crisis has metastasized... Yet the policy prescriptions coming out of Berlin and Frankfurt have hardly changed at all.
But wait, you say — didn’t last week’s summit meeting produce some movement? Yes... Germany gave a little ground... But these concessions remain tiny compared with the scale of the problems.
What would it really take to save Europe’s single currency? The answer, almost surely, would ... involve both large purchases of government bonds by the central bank, and a declared willingness by that central bank to accept a somewhat higher rate of inflation. Even with these policies, much of Europe would face the prospect of years of very high unemployment. But at least there would be a visible route to recovery.
Yet it’s really, really hard to see how such a policy shift could come about.
Part of the problem is ... that German politicians have spent the past two years telling voters something that isn’t true —... that the crisis is all the fault of irresponsible governments in Southern Europe... — ... now the false narrative stands in the way of any workable solution.
Yet ... even elite European opinion has yet to face up to reality. ... So will Europe save itself? The stakes are very high, and Europe’s leaders are, by and large, neither evil nor stupid. But the same could be said ... about Europe’s leaders in 1914. We can only hope that this time is different.