Wolfgang is a very reasonable fellow, but he's not above a little rhetorical slight of hand. In a recent comment on his blog he says that Krugman says that Spain, Portugal, etc. should leave the Euro. A couple of excerpts from what Krugman wrote today:
Nobody — certainly not me — believes that, say, Spain or even France can simply go back to Keynesian policies unilaterally. Instead, the point is that if European leaders want the euro to survive, they have to recognize that the austerity thing isn’t working, and offer Europe-wide alternatives. ... For in the end, Spain and others do have an alternative to endless austerity, one that may be forced on them by events: exit the euro, with all the financial and political fallout that follows. And on the current course, that’s what’s coming.
Predicting an earthquake is not the same thing as causing or even advocating one.
Are there suitable Europe-wide alternatives? Via a Tyler Cowen, this from Kantoos Economics:
In my view, the optimal policy – taking ECB policy as given – is to add monetary and fiscal stimulus to the periphery (only), as far as that’s possible, such that the period of adjustment is less painful, and limit the overheating of the German economy. I want the stimulus necessary to produce 0 + ε % inflation in Spain, and whatever inflation is necessary in Germany to result in 2% overall, for example 3% (Germany is a big country).
I couldn't really follow his suggestion as to how this could be effected, but:
Stimulus in the periphery is hard to accomplish, but the ECB could loosen policy (LTROs is a case in point) at the same time that Germany tightens lending standards, imposes higher transaction taxes on property, unilaterally increases capital requirements in banking etc. Regarding fiscal policy, my hope is an independent European fiscal policy fund, where each country has an account of, say, 20% of GDP that needs to be repaid in (AD-wise) good years, which are defined by above-target core inflation rates. This (jointly guaranteed) fund can be drawn on, much like the IMF, in return for some jointly agreed reform packages and ways to spend the stimulus. Any thoughts on this?
What an LTRO is is explained here.