Paul Krugman on Euro Rescue Efforts 'Right Now, We Need Expansion'

[xchrom]

http://www.spiegel.de/international/business/interview-with-economist-paul-krugman-on-euro-zone-rescue-efforts-a-834566.html

In a SPIEGEL interview, Nobel Prize-winning economist Paul Krugman argues that this is not the time to worry about debt and inflation. To save the euro zone, he argues that the European Central Bank should loosen monetary policy and the German government should abandon austerity.


SPIEGEL: Mr. Krugman, does Greece have to leave the euro zone?

Krugman: Yes. I don't see too much alternative now. It's going to be terrible in the first year if they do leave. So I am really reluctant to say that it's a little bit like shouting "Fire!" in a crowded theater, but what is the realistic option here? It's not as if anything anyone's proposing has any hope at all of getting them out of the mess they're in.
SPIEGEL: If Greece should leave, will this finally contain the euro crisis or, rather, make things worse?

Krugman: What happens if Greece leaves? Then you have again a bank run in other peripheral countries because they've set the precedent. But, again, that could be contained with lending from the ECB (European Central Bank). What has to happen is that the ECB has to be willing to replace all euros withdrawn as is necessary. And I think the case we're making for that lending becomes a lot easier because the Greeks were actually irresponsible. The Greeks actually did behave badly, and so the political case for unlimited exposure to Greece is very hard to make. A much easier case to make is for Spain and then Portugal and Italy, all of which did nothing wrong on the official side. So you could argue that the bad actor has been ejected, but we need to save the good actors.

SPIEGEL: But is the ECB ready to act in the way you propose?

Krugman: That's the mystery, right? We will see a big flood of money out of Spanish and Italian banks, and then the ECB has the choice to accept a big increase in its exposure to those countries. The ECB lending that much money with ultimately the Bundesbank on the hook for a lot of it -- that seems impossible. But if you say, well, the ECB won't be willing to do that, then the euro blows apart. And allowing the euro to fail -- that's impossible. But one of those two impossible things is going to happen.