2010 February 15 Monday
Krugman Wrong On Political Union For Euro Woes

Paul Krugman argues that the bigger problem with the Euro is that incompatible countries got placed into a currency union. Then he argues (incorrectly) that the currency problems can be solved with a political union that more tightly binds the nations of Europe together.

No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites — specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.

Agree about the arrogance of the policy elites. Then he goes on to portray Spain as fairly prudent before the financial crisis caused the property bubble to burst (though allowing a property bubble to run isn't prudent).

Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen. Its debts were low — 43 percent of G.D.P. in 2007, compared with 66 percent in Germany. It was running budget surpluses. And it had exemplary bank regulation.

Krugman describes the housing bubble that hit Spain so hard driven by lots of money flowing into the country. Then Spanish exports became uncompetitive as workers shifted over into housing (and likely finance as well). When the housing boom crashed so did tax revenues.

He blames Spain's milder version of Greece's sovereign debt problem on the bursting housing bubble and its aftermath.

Then the bubble burst. Spanish unemployment soared, and the budget went into deep deficit. But the flood of red ink — which was caused partly by the way the slump depressed revenues and partly by emergency spending to limit the slump’s human costs — was a result, not a cause, of Spain’s problems.

Okay, all plausible. He even says that if Spain had its own currency still it could loosen monetary policy to speed recovery. This might all be true. But where does Krugman go with this line of argument? Closer political union as the solution to the Euro problem:

Now, if Spain were an American state rather than a European country, things wouldn’t be so bad. For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida’s housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks.

But Spain isn’t an American state, and as a result it’s in deep trouble. Greece, of course, is in even deeper trouble, because the Greeks, unlike the Spaniards, actually were fiscally irresponsible. Greece, however, has a small economy, whose troubles matter mainly because they’re spilling over to much bigger economies, like Spain’s. So the inflexibility of the euro, not deficit spending, lies at the heart of the crisis.

This argument is very wrong and very ivory tower. Why would a much closer political union solve economic problems in Europe's labor market? Think about it. European people can't migrate around the continent in huge numbers on the scale that Americans do because they speak different languages and have much more distinctive national cultures. The huge US migrations into Florida, Nevada, and other recent targets of inward migration were possible because when people got out of their cars and applied to work at banks, gas stations, stores, mortgage companies, government offices, and large numbers of other businesses the people interviewing the job applicants spoke the same language.

Get down to the level at which an economy functions and we see some movement of upper managers and engineers who all can speak English together. Also, we see movement of people who can work in construction teams where foremen can be bi-lingual. But this approach doesn't scale up to an entire economy - at least not efficiently.

The single currency for both southern and northern Europe was a bad idea that is not fixable. It will continue to cause serious problems for decades to come.

I do not have a solution to offer on Europe. Pulling a few nations out of the Euro might well cause an even bigger recession. But leaving them in will set the stage for more sovereign debt crises and popular unrest.

Update: The US had a real estate bubble in Florida, Nevada, California, and Arizona. A political union didn't prevent it. We handled it differently (not clear if better) because the Federal Reserve doesn't share the attitudes of (heavily German influenced) European central bankers. We also have a much greater sense of shared nationhood because we've been a nation for over a couple hundred years. We could absorb European immigrants gradually into an existing culture. Trying to negotiate a common culture between rival nations is a far far larger job - an idea that only out-of-touch elites (hello Mr. Krugman) would entertain.

Share |      By Randall Parker at 2010 February 15 09:08 PM  Europe Monetary Union


Comments
A.Prole said at February 16, 2010 1:57 AM:

In fact, during the boom-years, Spain DID experience massive immigration (mostly third world), on an unprecedented scale.Despite decades of low birth-rates, Spain's population exploded due to immigration.
Fat lot of good it did too.
Krugman should know that inflation is purely a monetary phenomenom caused by growth in the money stock.Workers really have no say in it.

kurt9 said at February 16, 2010 8:46 AM:

So, Krugman does recognize that bubbles lead to mal-investment. Now, we just need to convince him that Keynesian fiscal policy is not appropriate to resolving a bubble-induced recession.

KG said at February 16, 2010 10:47 AM:

Krugman is always wrong. In the 1990s, he sometimes had interesting things to say, but something happened to his mind. He's always wrong.

mike said at February 16, 2010 12:12 PM:

LOL @ Krugman slamming "the arrogance of policy elites".

Death to Them All said at February 17, 2010 7:47 PM:

He got paid by Enron and he's never had a real job. The fucker lives in Princeton, NJ too and has never gone to Trenton. He knows nothing about the real world, but God willing, he'll experience it right in his fat face, hopefully at point blank.


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