Monday, October 24, 2011

Krugman Is Not Hopeful For Good Solution In Europe

Krugman describes the eurozone problem and raises concerns about arriving at a credible solution. One problem is that investors are demanding higher interest rates on Italian and Spanish debt. This makes it difficult for them to service their debt and increases the risk of default, which causes investors to demand even higher interest rates. Another problem is that if countries, like France, agree to provide funds to an agency that would support countries at risk, investors will believe that French debt is riskier and demand higher interest rates to purchase French debt.

Krugman is also concerned that imposing austerity on nations at risk, as a condition for granting support, will slow their growth rates and worsen their debt to GDP ratios.
He believes that the European Central Bank should do what the US Fed has done. It should print more euro's. This raises the ugly specter of inflation, but Krugman does not believe that hyper inflation is a threat during a European recession. Prices do not rise when wages are not rising and demand is weak. Core inflation has not increased in the US as the Fed has increased the money supply. It has also been tame in the UK following similar actions taken by its central bank.

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