Paul Krugman: Being Bad Europeans

What's the problem with Europe?:

Being Bad Europeans, by Paul Krugman, Commentary, NY Times: The U.S. economy finally seems to be climbing out of the deep hole it entered during the global financial crisis. Unfortunately, Europe, the other epicenter of crisis, can’t say the same. ...

Why is Europe in such dire straits? The conventional wisdom among European policy makers is that we’re looking at the price of irresponsibility: some governments have failed to behave with the prudence a shared currency requires, choosing instead to pander to misguided voters and cling to failed economic doctrines. And if you ask me (and a number of other economists who have looked hard at the issue), this analysis is essentially right, except for one thing: They’ve got the identity of the bad actors wrong.

For the bad behavior at the core of Europe’s slow-motion disaster isn’t coming from Greece, or Italy, or France. It’s coming from Germany.

I’m not denying that the Greek government behaved irresponsibly before the crisis, or that Italy has a big problem with stagnating productivity. But Greece is a small country whose fiscal mess is unique, while Italy’s long-run problems aren’t the source of Europe’s deflationary downdraft. If you try to identify countries whose policies were way out of line before the crisis, have hurt Europe since the crisis, and refuse to learn from experience, everything points to Germany as the worst actor. ...

Yet European policy makers seem determined to blame the wrong countries and the wrong policies for their plight. True, the European Commission has floated a plan to stimulate the economy with public investment — but the public outlay is so tiny compared with the problem that the plan is almost a joke. And meanwhile, the commission is warning France, which has the lowest borrowing costs in its history, that it may face fines for not cutting its budget deficit enough.

What about resolving the problem of too little inflation in Germany? Very aggressive monetary policy might do the trick (although I wouldn’t count on it), but German monetary officials are warning against such policies because they might let debtors off the hook.

What we’re seeing, then, is the immensely destructive power of bad ideas. It’s not entirely Germany’s fault — Germany is a big player in Europe, but it’s only able to impose deflationary policies because so much of the European elite has bought into the same false narrative. And you have to wonder what will cause reality to break in.