Thursday, September 06, 2012

Krugman Still An Optimist

What I’ve been arguing for a while is that saving the euro requires two things: (a) large ECB purchases of peripheral bonds (or at least a declared willingness to do so, to cap yields), and (b) an indication that the ECB will be willing to allow higher inflation to make adjustment possible.
It looks as if we sorta kinda got (a), although the details are hard to interpret. Nothing on (b) yet, and market indicators of inflation expectations are still too low.
So, a step in the right direction, probably enough to buy a significant amount of time, but not enough unless more follows.
The difference from what Kevin and I said is that he seems to be ignoring the rather explicit promises that (b)won't happen.  Of course we could hope that Draghi is not serious about sterilization.