Krugman: Arrogance of elites caused economic crises in Spain and Greece [View All]

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http://www.guardian.co.uk/commentisfree/cifamerica/2010/feb/15/greece-europe-single-currency

The real reason for the euromess
Greece and other European nations are in trouble because policy elites pushed the continent into adopting a single currency
Paul Krugman guardian.co.uk, 15 February 2010

Lately, financial news has been dominated by reports from Greece and other nations on the European periphery. And rightly so. But I've been troubled by reporting that focuses almost exclusively on European debts and deficits, conveying the impression that it's all about government profligacy and feeding into the narrative of our own deficit hawks, who want to slash spending even in the face of mass unemployment, and hold Greece up as an object lesson of what will happen if we don't.

For the truth is that lack of fiscal discipline isn't the whole, or even the main, source of Europe's troubles not even in Greece, whose government was indeed irresponsible (and hid its irresponsibility with creative accounting). No, the real story behind the euromess lies not in the profligacy of politicians but in the arrogance of elites specifically, the policy elites who pushed Europe into adopting a single currency well before the continent was ready for such an experiment.

Consider the case of Spain, which on the eve of the crisis appeared to be a model fiscal citizen. Its debts were low 43% of GDP in 2007, compared with 66% in Germany. It was running budget surpluses. And it had exemplary bank regulation. But with its warm weather and beaches, Spain was also the Florida of Europe and like Florida, it experienced a huge housing boom. The financing for this boom came largely from outside the country: there were giant inflows of capital from the rest of Europe, Germany in particular. The result was rapid growth combined with significant inflation: between 2000 and 2008, the prices of goods and services produced in Spain rose by 35%, compared with a rise of only 10% in Germany. Thanks to rising costs, Spanish exports became increasingly uncompetitive, but job growth stayed strong thanks to the housing boom.

Then the bubble burst. Spanish unemployment soared, and the budget went into deep deficit. But the flood of red ink caused partly by the way the slump depressed revenues and partly by emergency spending to limit the slump's human costs was a result, not a cause, of Spain's problems. And there's not much that Spain's government can do to make things better. The nation's core economic problem is that costs and prices have gotten out of line with those in the rest of Europe. If Spain still had its old currency, the peseta, it could remedy that problem quickly through devaluation by, say, reducing the value of a peseta by 20% against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation...