Krugman discusses global financial crisis, Europe
“If you had said in 2006 that we would be where we are now, very few people would have believed you,” Krugman said as he began the lecture.
Titled “Europe’s Two Depressions,” Krugman’s lecture primarily addressed the ongoing global financial crisis that began with the crash of the housing market in 2007. Although Krugman said that at the moment the U.S. economy “doesn’t seem to have an ongoing process of unraveling,” his outlook on Europe’s current financial situation was less optimistic. He noted that Europe has done worse financially in a number of respects than the United States has and is replicating many of the mistakes of the 1930s.
“Sometimes you read the headlines and say, ‘What year is this?’ ” he said. “Why does this sound so much like the 1930s?”
Krugman used the economic crisis that has dominated European politics as an entry point into the topic. He labeled Spain as the epicenter of the European crisis, though he was careful not to fault the country for fiscal irresponsibility. On the eve of the crisis, Spain had a budget surplus larger than Germany’s budget surplus and a public debt less than Germany’s, according to Krugman.
To explain the crisis, Krugman presented a graph looking at the increase in average budget deficits of European countries from 1999 to 2007. However, he said that the budget deficit does not exactly predict the crisis, even in retrospect.
In order to recover, Krugman said that he believes Europe needs a higher inflation rate to counteract the inflexibility of wage rates. He admitted, though, that he does not know what will happen on the continent and acknowledged that he often writes rather skeptical opinion columns in the Times.
Krugman questioned the incentives provided to manufacturers by Spain, suggesting that Spain could export more manufacturing goods to make up for the decline in construction employment.
Looking beyond Spain, he said the Euro has a bleak future ahead.
“If the Euro is going to survive, it is going to have to involve a large fall in the relative cost of labor ... to bring them back to something like where they were,” he said. However, he said that labor markets do not have the necessary flexibility to do this.
“The reality is that even countries that have what are widely praised as being flexible labor markets do not cut wages,” he said. “It just doesn’t happen. Nobody does that.” Although public-sector wages might drop down, he said, private-sector wages almost always creep down slowly even in the face of high unemployment. He cited Ireland as an example of the slow drop in wages.
“Not that long ago, Ireland was a paradigm of fiscal responsibility and flexibility,” he said. Nevertheless, in the face of 14 percent unemployment, wages still slowly “grinded” down.
Calling Europe a “noble experiment,” Krugman emphasized that he is not anti-Europe. He said that he believes the whole European project is about peace and democracy but that it is now in dire financial problems.
“What’s being asked of the countries in trouble is not possible,” he said. “You’re condemning them to debt inflation.”
Krugman ended with a brief question-and-answer session, fielding questions from audience members. The lecture, held in Dodds Auditorium, was the keynote address at the inaugural conference of the Julis-Rabinowitz Center for Public Policy and Finance at the Wilson School. Simulcasts were set up in three rooms for those waiting in line who were turned away from the auditorium.