Sunday, May 06, 2012

Krugman on the Euro

Wolfgang asked me what Krugman thought should be done about the Euro. I guessed inflation. Krugman makes it official.

... as I emphasized in that post earlier today, that German success story was based on a (modestly) inflationary boom in much of the rest of Europe. Give the peripheral countries a comparably favorable external environment — or actually a more favorable one, since they’re much deeper in the hole — and maybe there is a way to make this work. Let Spain regain competitiveness by inflating more slowly than Germany, rather than by deflating, and this whole thing might, might, become feasible.

But this means, yes, overall inflation in the euro area significantly higher than the less than 2 % target. It certainly means a lot higher than the 1.5% the market currently expects.

Don’t like that? OK, so no euro. It’s that stark.

If he's right, that means the choice is not between punishing borrowers vs savers, but between punishing savers vs everybody, including and mostly likely especially savers who lose really big on massive defaults.