Should-Read: Paul Krugman: Notes on European Recovery

Should-Read: It could have gone so much easier with more reflation in Germany. A one percent per year German inflation target is no way to run a railroad for general prosperity: Paul Krugman: Notes on European Recovery: “Since 201,,, we’ve seen significant growth in Europe, with the fastest growth occurring in the areas (other than Greece) that were hardest hit by the euro crisis, especially Spain…

…So what turned around in Europe? One important answer was three words from Mario Draghi: “whatever it takes”. The ECB’s promise to buy government bonds if necessary almost instantly ended a panic in southern European bond markets, drastically narrowing the spread against Germany and setting the stage for growth. The other thing that happened was internal devaluation…. Spain, in particular, gradually squeezed down its labor costs relative to the euro area as a whole. This has in turn fueled a big export boom, especially in autos. So is all well that ends well? No. Southern Europe paid a terrible price during the crisis years. The fact that internal devaluation eventually works, after years of high unemployment, is neither a surprise nor a vindication of the huge suffering during the interim. If there was a surprise, it was political: the willingness of political elites to pay this price rather than break with the euro. Still, it’s important to be aware that Europe 2018 looks very different from Europe 2013. For now, at least, Europe is back as a functioning economic system…

February 11, 2018


Brad DeLong
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