October 23, 2011
The Hole in Europe’s Bucket
By PAUL KRUGMAN
What does this have to do with Europe? Well, at this point, Greece, where the crisis began, is no more than a grim sideshow. The clear and present danger comes instead from a sort of bank run on Italy, the euro area’s third-largest economy. Investors, fearing a possible default, are demanding high interest rates on Italian debt. And these high interest rates, by raising the burden of debt service, make default more likely.
And here’s the problem: All the various proposals for creating such a fund ultimately require backing from major European governments, whose promises to investors must be credible for the plan to work. Yet Italy is one of those major governments; it can’t achieve a rescue by lending money to itself. And France, the euro area’s second-biggest economy, has been looking shaky lately, raising fears that creation of a large rescue fund, by in effect adding to French debt, could simply have the effect of adding France to the list of crisis countries. There’s a hole in the bucket, dear Liza, dear Liza.
You see what I mean about the situation being funny in a gallows-humor fashion? What makes the story really painful is the fact that none of this had to happen.
Think about countries like Britain, Japan and the United States, which have large debts and deficits yet remain able to borrow at low interest rates. What’s their secret? The answer, in large part, is that they retain their own currencies, and investors know that in a pinch they could finance their deficits by printing more of those currencies. If the European Central Bank were to similarly stand behind European debts, the crisis would ease dramatically.
Yet that achievement is under threat because the European elite, in its arrogance, locked the Continent into a monetary system that recreated the rigidities of the gold standard, and — like the gold standard in the 1930s — has turned into a deadly trap.
Now maybe European leaders will come up with a truly credible rescue plan. I hope so, but I don’t expect it.
The bitter truth is that it’s looking more and more as if the euro system is doomed. And the even more bitter truth is that given the way that system has been performing, Europe might be better off if it collapses sooner rather than later.