The end of the road for the euro?:
Euro Zone Death Trip, by Paul Krugman, Commentary, NY Times: Is it possible to be both terrified and bored? That’s how I feel about the negotiations now under way over how to respond to Europe’s economic crisis...
On one side, Europe’s situation is really, really scary: with countries that account for a third of the euro area’s economy now under speculative attack, the single currency’s very existence is being threatened — and a euro collapse could inflict vast damage on the world.
On the other side, European policy makers seem set to deliver more of the same. They’ll probably find a way to provide more credit to countries in trouble, which may or may not stave off imminent disaster. But they don’t seem at all ready to acknowledge a crucial fact — namely, that without more expansionary fiscal and monetary policies in Europe’s stronger economies, all of their rescue attempts will fail.
The story so far: The introduction of the euro in 1999 led to a vast boom in lending to Europe’s peripheral economies, because investors believed (wrongly) that the shared currency made Greek or Spanish debt just as safe as German debt. ... But when the lending boom abruptly ended, the result was both an economic and a fiscal crisis. ...
So now what? Europe’s answer has been to demand harsh fiscal austerity,... meanwhile providing stopgap financing until private-investor confidence returns. Can this strategy work?
Not for Greece... Probably not for Ireland and Portugal... But given a favorable external environment — specifically, a strong overall European economy with moderate inflation — Spain ... and ... Italy ... could possibly pull it off.
Unfortunately, European policy makers seem determined to deny those debtors the environment they need. ... And I see no sign at all that European policy elites are ready to rethink their hard-money-and-austerity dogma.
Part of the problem may be that those policy elites have a selective historical memory. They love to talk about the German inflation of the early 1920s — a story that, as it happens, has no bearing on our current situation. Yet they almost never talk about a much more relevant example: the policies of Heinrich Brüning, Germany’s chancellor from 1930 to 1932, whose insistence on balancing budgets and preserving the gold standard made the Great Depression even worse in Germany than in the rest of Europe — setting the stage for you-know-what.
Now, I don’t expect anything that bad to happen in 21st-century Europe. But there is a very wide gap between what the euro needs to survive and what European leaders are willing to do, or even talk about doing. And given that gap, it’s hard to find reasons for optimism.