Posts tagged: Euro

Res Ipsa Loquitur Because Paul Krugman Won’t

By , January 17, 2011 1:08 pm

Financial columnist and Nobel Laureate Paul Krugman has a decent piece in the New York Times about the Euro crisis, titled Can Europe Be Saved? I won’t spend any time debating what he says about the Euro. In fact, he seems spot on to me; however, in telling the story of the Euro’s problems, Krugman refuses to discuss the elephant in the room, the very same elephant he introduces at the beginning of his piece, but only to praise what he calls “perhaps the most decent societies in human history.” Why? Because the European countries “combin[ed] democracy and human rights with a level of individual economic security that America comes nowhere close to matching.”

As Krugman argues in the second paragraph of the story:

Not long ago Europeans could, with considerable justification, say that the current economic crisis was actually demonstrating the advantages of their economic and social model. Like the United States, Europe suffered a severe slump in the wake of the global financial meltdown; but the human costs of that slump seemed far less in Europe than in America. In much of Europe, rules governing worker firing helped limit job loss, while strong social-welfare programs ensured that even the jobless retained their health care and received a basic income. Europe’s gross domestic product might have fallen as much as ours, but the Europeans weren’t suffering anything like the same amount of misery. And the truth is that they still aren’t. (elephant in bold)

I’ll come back to that elephant in a moment. But first, a summary of Krugman’s story of the Euro: Essentially, European leaders made the case for a single European currency by citing facts that supported a single European market–ignoring the fact that the case for the former was much weaker than the case for the latter. Yes, a single currency would make for easier trading among countries and peoples: Italians visiting England could do so without changing currencies; Germans and French could set contract prices without worrying about fluctuations in the exchange rate. But, if Spain’s real estate market tanked or if Ireland tipped uncomfortably on the edge of bankruptcy, an important tool would no longer be available to them to help resolve the crisis: They could no longer devalue their currencies to deal with wage and prices that are out of line.

In short, those countries no longer have flexible exchange rates in their tool boxes, and as Kruman writes,

These achievements [aka the elephant] are now in the process of being tarnished, as the European dream turns into a nightmare for all too many people. How did that happen?

He then launches into an interesting story of the Coal and Steel Community, Emulsified High-Fat Offal Tubes, the transition to the Euro, and what he calls the Iceland-Brooklyn issue, essentially a metaphor that illustrates what Milton Friedman said, as paraphrased by Krugman: “forming a currency union [such as what Europe did with the Euro] means sacrificing flexibility. As they say, read the whole thing.

Now back to the elephant. Krugman hinted at the elephant problem in that last block quote, but he never draws a bright line from those very expansive, very strong, and way too expensive social-welfare programs and the equally strong labor protections to the economic crisis at hand. That may to too much for the Nobel Prize-winning economist to admit to, given his praise for these “most decent societies.” He does–in spite of himself, but to his credit–draw some dotted lines, as he discusses wage demands, real estate bubbles, borrowing, and the like.

He fails miserably, however, when he discusses the public debt crisis–take Greece for example–and never once ties that debt crisis directly to the social-welfare safety net and labor protections in Europe.

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