Paul Krugman has a reasonably to the point Op-ed in the New York Times today. It starts off like this:
I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.
and ends up like this:
For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction. In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
Amen to that!
Meanwhile, Spain’s Economy Minister Pedro Solbes has been talking about EU Bonds:
The euro zone is not yet ready for a joint bond but states in the 16-member currency area could coordinate their debt issuance more closely, a German newspaper on Wednesday reported Spain’s economy minister as saying. ‘I think the currency union is not yet ready for something like that,’ Economy Minister Pedro Solbes, referring to the idea of a joint bond, told Germany’s Handelsblatt in extracts of an interview to run in the business daily’s Thursday edition.
So the argument isn’t that they are not a good idea, it is that – with Spain’s unemployment now at 3.5 million, and money starting to run out on the public works “stimulus programme” – we aren’t yet ready for them. When will we be ready, when Spanish unemployment here hits 5 million, or six, or seven, or when we have 5 million people who have run out of unemployment benefit payments, when things eventually start to fall apart at the eurozone level, or after the German elections, perhaps? Come on. Enough of all this passivity. Let’s have some action up there. The issue is we set up a currency union without the necessary political architecture to make it work, so now we need to go to work on the architecture. Do our leaders have the mettle to finish the job, or, as Krugman fears, are they simply intent on proving all the skeptics right!
You can find some explanation of what EU Bonds are, and how they might work, in this post here.
Is the professor coming to see you 🙂
I am not sure Prf. Krugman’s points deserve too much attention when he talks about Europe. First, he is American with a particular political agenda and his advises are unheeded in US. It can well be a case of “nemo profeta in patria”, but his arguments are old since at least the creation of the Euro…Same skepticism but we made it! Let’s be more pragmatic economists. We have a problem and we need to find a solution studying trade-offs and options. Forget Prof. Krugman’s arguments of old international economic diplomacy. So now it comes to the EU bond.
On my blog, I made again the case for an EU bond. I do not agree with Spain’s Economy Minister Pedro Solbes. We are immediately ready for a joint EU bond for an initial market of over 120 billions €. Just go back to the Delors’ idea and start funding the EU budget with an issuance of EU bonds. As I wrote at present the EU budget is funded in any case annually by resources members states’ treasuries, which issue themselves bonds as they are in deficit. So just make a common issuance and members states will contribute for their share. Technicalities can also be worked out in the same way we did for the introduction of the Euro. It’s not a problem. When a market is created EU bond issuance can be scaled up for other purposes (including banks recapitalization or other country rescue packages) as needed and appropriate. It’s a kind of situation where you create the instrument first (like the Euro) and by this mean you continue the integration. It’s a pragmatic approach. But if you follow Krugman’s point, like other American economist, you may tend to think that the Euro was a mistake whereas the point is that Euro and EU bond can rival dollar and treasuries…
Is there an analysis of how things would play in Europe without the euro? Who am I to doubt the euro skeptics and Krugman but I think it would be a lot worse. I also believe that things would actually be better with more countries in the eurozone (like UK & Sweden).
At http://www.we-change-europe.eu you can vote, if you will get involved in the following two important topics:
We-Enlarge: The Europeans are enlarging their Union!
We-Elect: The Europeans elect their President!
Please click “Yes†or “No†at the “We Change Europeâ€-Website.
In my point of view the citizens of the member states should elect the president of the European Union. This direct democratic election of the president could even bring the citizens closer to their Union.
Other than some outdated anti Richaliu view of the world, what exactly doe the Eurozone stand for anyway, other than to constrain more than anything. The EU is apolitical quagmire seeking to indenture its weakest in anet of transfer payemnts – isn’t that the model. Just a modest american here and vieing this through the prism of the increasing states rights movement here. Interesting to watch the ruo boosters talk wildly about their dream while france relentlessly presses the zone while championing its home companies. Germany simply looks disinterested. I have never seen a convincing argument for why the EU needs to exist esepecially in view of the fact that they collectivly can’t defend themselves against Haiti? Then again multi – overreach is epic on the continent – as evidenced most recently in the idea of UK taking over Turcs and Caicos or the ICC issuing a warrant for a sitting president. Fukyama may have been wrong about the end of history, but perhaps he was right about the coming end of so many retrograde 20th century constructs.
Does anyone know how much Euro-bond financing Spain would need and what they would use the funds for?
Hi,
“Does anyone know how much Euro-bond financing Spain would need and what they would use the funds for?”
Well my guess is around 500 to 600 billion euros for Spain alone, mainly to clean up non performing builders and developers loans which are piling up in the banking system and to refinance the extenal loans which paid for the mortgages. But this is only a guess, although I think the total magnitude cannot be much smaller.
Non of this is a total right off, so some of it could be recovered one day, but I think we should be clear, Spain has an enormous problem created by a faulty monetary policy, so cleaning all this up will need a sacrifice from everyone.
Also, since my proposal for the bonds is that the ECB buy them directly (ie print money) – part of their role is to fuel inflation. I am also in favour of the ECB upping their inflation target for a number of years, say the 3 to 4 percent range, since if we don’t do something to sweat off all the debt Europe’s young people will be years emerging from under all the rubble left by the housing boom.
I do not know where these figures come from and I would not like that is Krugman again speaking as he used to write “make it bigger” already at the level of 600 billion US stimulus… In no way in the EU system anybody will foot the bill of housing or construction sectors in trouble, all the more by issuing EU bonds. That is not possible. On the other hand, Spanish banking system is still solid. I also wonder about this concept of faulty monetary policy.
Hi,
“I do not know where these figures come from”
Well they come from me. Really you need to go over and read through my posts on the Spanish economy watch blog, going all the way back to the summer of 2007, my argument has being pretty systematic and consistent, and now the endgame situation is approaching.
“In no way in the EU system anybody will foot the bill of housing or construction sectors in trouble, all the more by issuing EU bonds.”
Well then we’d better all get ready for the end of the eurozone, hadn’t we, since there are not too many more alterantives at this point. The damage is already done, and if it isn’t fixed, then “boom”!
Also, if Frankfurt falls, behind comes Tokyo and Washington, so its back to the vegetable garden all round. It only occured to me last night, if there is no more euro, who is going to pay for all those pieces of paper being held all over the place (I mean euro denominated bonds). One thing would be an orderly “disolution” (which no one wants), and quite another thing would be a blow out and rout.
Letting the ECB crash would be a much bigger problem then let Lehman Bros go. I really don’t want to even think about this, so I imagine, after all the kicking and screaming people will end up doing the right thing.