Paul Krugman: An Impeccable Disaster:
The "euro is now at risk of collapse":
An Impeccable Disaster, by Paul Krugman, Commentary, NY Times: On Thursday Jean-Claude Trichet, the president of the European Central Bank or E.C.B. — Europe’s equivalent to Ben Bernanke — lost his sang-froid. In response to a question about whether the E.C.B. is becoming a “bad bank” thanks to its purchases of troubled nations’ debt, Mr. Trichet, his voice rising, insisted that his institution has performed "impeccably, impeccably!" as a guardian of price stability.
Indeed it has. And that’s why the euro is now at risk of collapse. ... At this point countries in crisis account for about a third of the euro area’s G.D.P., so the common European currency itself is under existential threat. ...
Listen to many European leaders — especially, but by no means only, the Germans — and you’d think that their continent’s troubles are a simple morality tale of debt and punishment: Governments borrowed too much, now they’re paying the price, and fiscal austerity is the only answer.
Yet this story applies, if at all, to Greece and nobody else. Spain in particular had a budget surplus and low debt before the 2008 financial crisis; its fiscal record, one might say, was impeccable. ...
So why is Spain — along with Italy, which has higher debt but smaller deficits — in so much trouble? The answer is that these countries are facing something very much like a bank run, except that the run is on their governments rather than, or more accurately as well as, their financial institutions. ...
Now, a country with its own currency, like Britain, can short-circuit this process:... the Bank of England can step in to buy government debt with newly created money. This might lead to inflation (although even that is doubtful when the economy is depressed); but inflation poses a much smaller threat to investors than outright default. Spain and Italy, however, have adopted the euro and no longer have their own currencies. ...
What Mr. Trichet and his colleagues should be doing right now is buying up Spanish and Italian debt — that is, doing what these countries would be doing for themselves if they still had their own currencies. ...
We’re not talking about a crisis that will unfold over a year or two; this thing could come apart in a matter of days. And if it does, the whole world will suffer. So will the E.C.B. do what needs to be done — lend freely and cut rates? Or will European leaders remain too focused on punishing debtors to save themselves? The whole world is watching.
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