In recent online commentary for The New York Times, Simon Johnson, the former chief economist for the International Monetary Fund, considered who is in worse shape — America or Europe?
“In the near term, the Europeans have the bigger problem — and this will only be compounded by slower growth in the United States (home to about one-quarter of the world economy),” Mr. Johnson wrote on July 28. “Over the longer haul, it remains to be seen when and how politicians in the United States will take up the real budget issues.”
Basically I agree with his assessment: Europe has more fundamental problems in sheer economic terms, because it adopted a single currency without the necessary institutions to make it workable. The United States has a long-run budget problem, but our current mess is entirely political. Unfortunately, that doesn’t make it any easier to solve.
What’s extraordinary, though, is the paralysis that has taken over essentially the entire advanced world. America is hamstrung by its crazy right; Europe by its single currency that can be neither abandoned nor accompanied by sufficient reforms to make it work; Japan by lousy demography and monetary timidity that is now deeply ingrained in expectations.
Technology continues to advance; resource shortages are not severe enough to pose a major constraint; climate change is terrifying in its long-run implications, but hasn’t inflicted much damage yet. The only major problem we have right now is the one that was supposed to be easy to solve: a simple lack of adequate demand. And we’re totally failing in our response.
In the long run, Keynes must be spinning in his grave.
For some reason, events in European bonds markets aren’t making big headlines. But they should be: Even as the Republicans have been doing their best to destroy America’s credit, things are falling apart, with a vengeance, on the other side of the Atlantic.
The interest rate spread between Italian and German bonds is now higher than it was before the big European rescue package was announced. Since the purpose of that package was, first and foremost, to calm markets before Italy and Spain sank into self-fulfilling debt spirals, this is very bad news.
Also, German interest rates are plunging. This does not reflect greater confidence in German solvency; if anything, investors are less confident in that respect, as the potential costs of a peripheral bailout start to get reflected in credit assessments of the core economies. What this is surely about, instead, is the growing sense that European recovery is sputtering out, and that the European Central Bank — which sets short-term rates — will eventually call off or even reverse its planned rate hikes, with rates staying low for a long time.
In short, what the markets seem to be seeing is disaster on the periphery and the Japanification of the core. And I can’t say they’re wrong.
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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 2011 The New York Times.