Krugman: "Save" the Euro by Creating Another Unsustainable Boom

In his latest column, Paul Krugman explains why he believes that the euro has been crashing, and in part, I agree. Europe, he says, is not like the United States which actually is a unified country which also has a federal government that spreads its own spending programs throughout those states. (This is not in praise of those programs, but rather an admission that there is more tying the USA together than what we see in the European Union.)

Furthermore, I agree with Krugman that the housing boom especially covered the underlying flaws of the EU and its currency. Krugman writes:

Why did the euro seem to work for its first eight or so years? Because the structure’s flaws were papered over by a boom in southern Europe. The creation of the euro convinced investors that it was safe to lend to countries like Greece and Spain that had previously been considered risky, so money poured into these countries — mainly, by the way, to finance private rather than public borrowing, with Greece the exception.

And for a while everyone was happy. In southern Europe, huge housing bubbles led to a surge in construction employment, even as manufacturing became increasingly uncompetitive. Meanwhile, the German economy, which had been languishing, perked up thanks to rapidly rising exports to those bubble economies in the south. The euro, it seemed, was working.

I even agree with Krugman's next statement:

Then the bubbles burst. The construction jobs vanished, and unemployment in the south soared; it’s now well above 20 percent in both Spain and Greece. At the same time, revenues plunged; for the most part, big budget deficits are a result, not a cause, of the crisis. Nonetheless, investors took flight, driving up borrowing costs. In an attempt to soothe the financial markets, the afflicted countries imposed harsh austerity measures that deepened their slumps. And the euro as a whole is looking dangerously shaky.

At that point, however, the agreement stops, as Krugman then decides that the best way to "fix" the crisis is essentially to engage in an economic version of "hair of the dog." He writes:

What could turn this dangerous situation around? The answer is fairly clear: policy makers would have to (a) do something to bring southern Europe’s borrowing costs down and (b) give Europe’s debtors the same kind of opportunity to export their way out of trouble that Germany received during the good years — that is, create a boom in Germany that mirrors the boom in southern Europe between 1999 and 2007. (And yes, that would mean a temporary rise in German inflation.) The trouble is that Europe’s policy makers seem reluctant to do (a) and completely unwilling to do (b).

I must admit that even though I have read Krugman for many years, something like this shocks me. The European and U.S. economies have been suffering in the aftermath of the collapse of the housing bubble, and the response of governments and central banks has been to try to recreate boom conditions somewhere else via easy credit and monetary expansion. We see how well that has worked.

So now Krugman claims that Europe and the euro will be saved if the EU Central Bank can do in Germany pretty much what it did in Greece, Ireland, Spain, and Portugal. And what happens when that boom/bubble in Germany collapses, as it inevitably would?

That's easy. Krugman will demand that the authorities create a bubble somewhere else. Maybe he wasn't joking in 2003 when he called for the creation of a housing bubble in the USA. And when the bubble crashes, then he can blame private enterprise.