Krugman on Euro-Zone Rescue Efforts

Economist Paul Krugman recently gave an interview to German magazine Der Spiegel in which he argues that this is not the time to worry about debt and inflation. Here are some choice excerpts:

On Greece leaving the euro zone:

What happens if Greece leaves? Then you have again a bank run in other peripheral countries because they’ve set the precedent. But, again, that could be contained with lending from the ECB (European Central Bank).

On ECB lending money to troubled banks and countries:

That’s the mystery, right? We will see a big flood of money out of Spanish and Italian banks, and then the ECB has the choice to accept a big increase in its exposure to those countries. The ECB lending that much money with ultimately the Bundesbank on the hook for a lot of it — that seems impossible. But if you say, well, the ECB won’t be willing to do that, then the euro blows apart. And allowing the euro to fail — that’s impossible. But one of those two impossible things is going to happen.

On repeatedly pointing out that Germany’s pushing for austerity will lead Europe on a death trip and that prosperity through pain is a fantasy.

That’s right. I thought it was obvious from the beginning that this is never going to work. If the policy makes any sense at all, it’s through mass unemployment, driving down Spanish wages. How many years is that supposed to take given that we’ve seen that, even with close to 25 percent unemployment, you will have a glacial pace of wage adjustment?

On spending our way out of trouble:

Any individual country, except Germany, doesn’t have this option. It’s not as if the government of Spain can simply reverse and go to Keynesian policies. They can’t fund that. Put it this way: If you’re the prime minister of a small European country, even a fairly big one like Spain, you have no option. Your options are to have some form of austerity, possibly while protesting, or simply to leave the euro. But Frankfurt and Berlin have choices.

On what should the ECB and the German government to do:

First of all, give the green light to the ECB and say: Price stability is the mandate, but it’s not defined. So the reality is we’re going to need to see 3-plus percent inflation over the next five years. No more tightening, no more raising interest rates at the first hint of inflation, even if it’s obviously a commodity blip. If anything, cut interest rates. Open-ended lending to governments and banks.

On growth programs that are currently being discussed within the European Union:

This is a water pistol against a charging rhinoceros. This is ridiculous. These are ludicrous, trivial things compared with the scale of what’s going on.

On more more debt:

I’m not saying that I don’t ever care about debt, but not now. […] Give me a strong-enough economic recovery that the Fed is starting to want to raise interest rates to head off inflation — then I become a deficit hawk.

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