They say that if you are thrown from a horse, it is really important that the first thing you do is get right back on. Having just had my ears soundly boxed on the subject of Krugmania, here is another Krugman semi-prediction. First Paul K get depressed by reading Paul de Grauwe.

He rises to the occasion with a SF reference and:

The key point, which I’ve finally taken fully on board, is that in addition to the huge problems of adjustment created by a rigid exchange rate in the aftermath of a bubble, the fact that European nations no longer have their own currencies leaves them vulnerable to self-fulfilling debt crises – in effect bank runs on governments rather than banks (although those too).

To head off this risk, somebody – the EFSF, the ECB, whatever – has to be ready to act as lender of last resort; Eurobonds would have served much the same purpose.

By resigning from the ECB, Juergen Stark has conveyed, deliberately or not, the message that there will be no such lender of last resort, that there isn’t enough political cohesion in the eurozone to stand behind countries under market attack. And this translates directly into soaring spreads for Spain and Italy; the self-fulfilling crisis is on.


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