Europe's Leaders Double Down on a Failed Strategy

Tuesday, 22 May 2012 09:18 By Paul Krugman, Krugman & Co. | Op-Ed
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Germany train carting along EU(Image: CartoonArts International / The New York Times Syndicate)I guess we knew this was coming, but in the face of the French and Greek election results and the broader evidence that Europe's economic strategy is an utter failure, the usual suspects are, you guessed it, doubling down.

Simon Wren-Lewis, an economics professor at Oxford, has looked on in horror as the Dutch have agreed on completely unnecessary austerity measures, as a way of showing their commitment to Europe's totally misguided fiscal pact. "Towards the end of April the Dutch conservative coalition government collapsed when the far-right party refused to discuss further budget cuts," Mr. Wren-Lewis wrote on his blog on May 7. "The prime minister resigned. And yet a few days later other parties rallied round to give their support to a similar package of austerity measures, which now have majority support in parliament."

British Prime Minister David Cameron vowed "no going back" on his failed austerity strategy in a speech after the elections.

And Jens Weidmann, president of the German central bank, vowed to destroy the euro. O.K., that's not what he said in so many words, but that's the implication of his op-ed in the Financial Times on May 7. The meat is at the end: "Monetary policy in the euro zone is geared towards monetary union as a whole; a very expansionary stance for Germany therefore has to be dealt with by other, national instruments," Mr. Weidmann wrote. "However, this also implies that concerns about the impact of a less expansionary monetary policy on the periphery must not prevent monetary policy makers' taking the necessary action once upside risks for euro zone inflation increase. Delivering on its primary goal to maintain price stability is the prerequisite for safeguarding the most precious resource a central bank can command: credibility."

Let's parse this. "A very expansionary stance for Germany therefore has to be dealt with ..." I'm pretty sure is code for saying that Germany will try to prevent any inflationary impact of low European Central Bank rates with fiscal contraction. Austerity for all! (And no help for peripheral economies in the form of above-normal German inflation.)

And then, a declaration that the E.C.B. will tighten to prevent any "upside risks for euro zone inflation" — even if the southern economies are facing deflation.

Put it together, and it's a declaration that all of the burden of "internal devaluation" — the need to bring costs and prices in Spain and others down relative to the core — will be borne by deflation in the south.

This won't work, of course; it's a prescription for catastrophic failure of the euro.

What is Mr. Weidmann thinking?

My guess is that he isn't — or at least that there's no model there, just a series of central bankerish catch-phrases strung together, in a way that fails to reveal the underlying impossibility of the strategy.

All in all, nothing learned, and no willingness to reconsider.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008. Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including "The Return of Depression Economics" (2008) and "The Conscience of a Liberal" (2007).
Copyright 2014 The New York Times.

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