Morning Must-Read: Paul Krugman: Europanic 2.0

• Paul Krugman: Europanic 2.0 – NYTimes.com “Anyone who works in international monetary economics…

…is familiar with Dornbusch’s Law: ‘The crisis takes a much longer time coming than you think, and then it happens much faster than you would have thought.’ And so it is with the latest euro crisis… the euro area as a whole, which is sliding into a deflationary trap with the ECB already essentially at the zero lower bound. Draghi can try to get traction through quantitative easing, but it’s by no means clear that this could do the trick… and… he faces severe political constraints…. What strikes me, also, is the extent of intellectual confusion that remains. Germany still seems determined to regard the whole thing as the wages of fiscal irresponsibility, which not only rules out effective fiscal stimulus but hobbles QE, since it’s anathema for them to consider buying government debt. And it’s remarkable, too, how the logic of the liquidity trap remains elusive even after six years–six years!–at the zero lower bound. Not the worst example, but I read Reza Moghadam…. Augh! If it’s external competitiveness you’re worried about, depreciating the euro is what you want, not wage cuts. And cutting wages in a liquidity-trap economy almost surely deepens the slump. How can this not be part of what everyone understands by now? Europe has surprised many people, myself included, with its resilience. And I do think the Draghi-era ECB has become a major source of strength. But I (and others I talk to) are having an ever harder time seeing how this ends… non-catastrophically…. What’s your scenario?