Saturday, January 15, 2011

Euro Economics: Only Half the Story

. Saturday, January 15, 2011

I found Krugman's NYTimes mag article on the economics of the eurozone to be solid. Of course at this point the economics are well-understood by informed observers. What's not is the politics of the eurozone. And on that point Krugman is no help, as evidenced by his closing:

So will Europe’s strong nations let that happen? Or will they accept the responsibility, and possibly the cost, of being their neighbors’ keepers? The whole world is waiting for the answer.

Well, we've been writing about that a lot over the past year or so. So far it seems clear that the strong nations in the EMU (especially Germany) are not prepared to be their neighbors' keepers. They are not ready to ditch the common currency either. So they've taken (perhaps) the worst option: forced austerity for the periphery in exchange for temporary solvency, in order to give the banks in the core time to get their books in order. That, and allow the ECB to take a more active role than they are (technically) legally allowed.

As of today, I think the ball is actually in the peripheral countries' court. If they do a "full Argentina", as Krugman calls it, or even a milder debt restructuring, it will force Frankfurt's hand. If they are willing to stick it out and go through crushing austerity -- the Baltic option -- then the eurozone will survive on something like its present course. I wouldn't put any money on the latter happening in Greece or Spain, although it could work in Ireland.

The point is that, at this point, the economics is merely the backdrop for the politics.


Euro Economics: Only Half the Story
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