Paul Krugman’s Advice to Italy and Spain: Inflate and Stimulate

Paul Krugman continues to think that what’s going on in Greece, Italy, and Spain says nothing—nothing!—about the political culture surrounding welfare statism in Europe and everything about the way the euro ties the hands of those making monetary policy:

Japan is much more deeply in debt than Italy, but the interest rate on long-term Japanese bonds is only about 1 percent to Italy’s 7 percent. Britain’s fiscal prospects look worse than Spain’s, but Britain can borrow at just a bit over 2 percent, while Spain is paying almost 6 percent.

What has happened, it turns out, is that by going on the euro, Spain and Italy in effect reduced themselves to the status of third-world countries that have to borrow in someone else’s currency, with all the loss of flexibility that implies. In particular, since euro-area countries can’t print money even in an emergency, they’re subject to funding disruptions in a way that nations that kept their own currencies aren’t — and the result is what you see right now. America, which borrows in dollars, doesn’t have that problem.

The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.

In other words, Krugman wishes Greece, Italy, and Spain had the flexibility to inflate and deficit spend their way out of their current crises. The euro has goofed that option up for them.

Is Krugman right? Is there really no such thing as financial gravity? Can you balloon a country’s currency and debts without paying the piper sooner or later? 

I’m not a Nobel Prize winning economist like Krugman is, but I’d bet that a decade from now Ireland will be in a much, much better economic position than those countries that inflate their debts and currencies as a matter of policy today.

But what do I know?

Question expertise?

About Santi Tafarella

I teach writing and literature at Antelope Valley College in California.
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2 Responses to Paul Krugman’s Advice to Italy and Spain: Inflate and Stimulate

  1. jessica says:

    I really enjoy your insight into matters of our world. Never followed a blog in my life and I’m not even sure how or why I found U. U have a way of simplifying issues into terms comprehensable by most. Your random timing is appreciated too. Thank U.

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