[lbo-talk] Krugman: How the euro makes the downside worse

Michael Pollak mpollak at panix.com
Tue Jan 20 02:06:28 PST 2009


http://krugman.blogs.nytimes.com/2009/01/19/the-pain-in-spain/

Paul Krugman - New York Times Blog

January 19, 2009, 4:22 pm

The pain in Spain ...

... isn't hard to explain. Spain was basically Florida, with a housing

bubble inflated by both resident and holiday purchases, and now the

bubble has burst.

But Spain is in worse shape than Florida, for two reasons -- reasons

familiar to anyone who was involved in the great debate about whether

the euro was a good idea.

First, Europe doesn't have a central government; Spain, unlike Florida,

can't draw on Social Security and Medicare checks from Washington. So

the burden of recession falls entirely on the local budget -- hence the

country's declining credit rating.

Second, the United States has a more or less geographically integrated

labor market: workers move from distressed regions to those with better

prospects. (The housing bust has, however, reduced mobility because

people can't sell their houses.) Europe does not: yes, there's a fair

bit of mobility both among the elite and among low-wage workers at the

bottom, but nothing like the US level.

So what can Spain do? It needs to become more competitive -- but it

can't have a devaluation, because it's a euro country. So the only

alternative is wage cuts, which are desperately hard to achieve (and

create big problems for debtors.)

Contrary to what everyone seemed to be saying even a few weeks ago,

being a member of the eurozone doesn't immunize countries against

crisis. In Spain's case (and Italy's, and Ireland's, and Greece's) the

euro may well be making things worse.

And Britain's plunging pound, unpopular though it is, may turn out to

have been a very good thing.



More information about the lbo-talk mailing list