[Paul] Krugman also told Handelsblatt he wouldn’t rule out sanctions against Germany if it continued to rely on its export-driven model. “If the euro falls to parity with the dollar, the Europeans are going to be surprised by the demands that will come out of the U.S. Congress, and I would support that,” he said.
That fiscal and economic policy critique probably won’t gain any more traction in Germany than his monetary policy one. Germans see their government finances and trade competitiveness as an example to be followed by Greece, Portugal and other troubled countries in Europe. And they clearly don’t see the U.S. model as one worth chasing.
Wolfgang Franz, who heads the German government’s economic advisory panel known as the Wise Men, tore into Krugman ”” and the US ”” in an op-ed in the German business daily Wednesday, titled “How about some facts, Mr. Krugman?”
“Where did the financial crisis begin? Which central bank conducted monetary policy that was too loose? Which country went down the wrong path of social policy by encouraging low income households to take on mortgage loans that they can never pay back? Who in the year 2000 weakened regulations limiting investment bank leverage ratios, let Lehman Brothers collapse in 2008 and thereby tipped world financial markets into chaos?” he wrote.
Krugman has a pretty good response.
So Krugman’s response is basically if Germany isn’t willing to risk another dance with hyperinflation ala 1092’s for the universal benefit of the world Progressive Socialist team Krugman would support democratically bullying them into ‘doing the right thing’ as defined in Krugman’s beneficent little mind. Awfully white of Krugman, don’t you think?
I think Franz’ response is a complete non sequitur. Though I don’t often agree with Krugman, Krugman has been critical of many of the elements of the American economic system that led to the near meltdown for years. Franz is reiterating what Krugman has talked about for years, which I think weakens his logic.
Secondly, Franz’ response compares apples to oranges. What caused the American problems is not at play in the Greece bailout. I have talked at length about this both here on this blog and elsewhere. Germany’s response was to apply American style “bail out” logic to the Greece/Spain problem, when the American “bail out” was premised on a crisis of liquidity. The Greece problem is a flat out basic economic problem of insolvency. Greece ran up a huge debt of its own free will and put itself on the road to bankruptcy when the creditors stopped issuing credit. Saddling Greece with more debt so as to bail them out and keep the EU situation afloat is nonsense.