Paul Krugman: The Euro Crisis Will End With Something ‘Impossible’ Happening

In an exclusive interview, Paul Krugman — who just published a new book titled End This Depression Now! — tells us how the Euro crisis will end.

He basically sees two possible outcomes, both of which are “impossible.”

One possibility is that the ECB aggressively buys peripheral debt and caps the borrowing costs of Spain and Italy, while simultaneously making it clear that they’re going to promote “expansionary monetary policies” that boost inflation in Germany and help restore competitiveness between Germany and the periphery.

That can work… it’s still going to be extremely painful,” he says.

“Any solution is going to come out of Berlin and Frankfurt… Frankfurt will do the actual lifting, but has to have Berlin’s permission.”

But would Berlin actually sign off on an ECB-based debt monetization, pro-inflation scheme? That’s very un-German.

That gets to Krugman’s other possibility … Basically, eventually the ECB stops propping up all the banks (as they are now), and you get bank runs, bank holidays, and currency redenominations. That would mean the end of the euro system, which would then bring “cataclysmic” effects, both economic and legal.

You look at that scenario, says Krugman, and it seems impossible that the Germans would let the entire project disintegrate like this.

So what happens?

“I say it’s 50/50 … Either the Germans have to accept something they consider unacceptable, or they have to accept something, the breakup of the euro, that they consider something unacceptable.”

As for which way the Germans lean, he says, “They’re complicated … they’re not all as rigid as they are in official positions.”

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: