Paul Krugman: That 1914 Feeling

Can the European Union avoid disaster?:

That 1914 Feeling, by Paul Krugman, Commentary, NY Times: ...A forced Greek exit from the euro would create huge economic and political risks, yet Europe seems to be sleepwalking toward that outcome. ...

The thing is, it’s pretty clear what the substance of a deal between Greece and its creditors would involve. ...Greece can’t and won’t pay all of the interest coming due, let alone pay back its debt...

So we know what the outcome of a successful negotiation would be: Greece would be obliged to run a positive but small “primary surplus,” that is, an excess of revenue over spending not including interest. ...

Meanwhile, the alternative — basically Greece running out of euros, and being forced to reintroduce its own currency amid a banking crisis — is something everyone should want to avoid. Yet negotiations are ... going badly, and there’s a very real possibility that the worst will, in fact, happen.

Why can’t the players here reach a mutually beneficial deal? Part of the answer is mutual distrust. ...

Yet there seems to be more to it than lack of trust. Some major players seem strangely fatalistic, willing and even anxious to get on with the catastrophe – a sort of modern version of the “spirit of 1914,” in which many people were enthusiastic about the prospect of war. These players have convinced themselves that the rest of Europe can shrug off a Greek exit from the euro, and that such an exit might even have a salutary effect by showing the price of bad behavior.

But they are making a terrible mistake. Even in the short run, the financial safeguards that would supposedly contain the effects of a Greek exit have never been tested, and could well fail. Beyond that, Greece is, like it or not, part of the European Union, and its troubles would surely spill over to the rest of the union even if the financial bulwarks hold.

Finally, the Greeks aren’t the only Europeans to have been radicalized by policy failure. In Spain, for example, the anti-austerity party Podemos has just won big in local elections. ...

None of this needs to happen. All the players at the table, even those much too ready to accept failure, have good intentions. There’s hardly even a conflict of interest between Greece and its creditors — as I said, we know pretty much what a mutually beneficial deal would involve. But will that deal be reached? We’ll find out very soon.