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Paul Krugman - New York Times Blog
August 4, 2010, 9:12 am
Give Me Your Tired, Your Poor, Your Hungary
I'm a little late getting to this report on Hungary's loss of patience
with austerity; it should be read in conjunction with this terrific
Fistful of Euros piece from a few weeks ago that I meant to link but
never got around to, Scenes from an internal devaluation.
Basically, Hungary is pursuing a harsh, seemingly endless austerity
program, and keeping interest rates relatively high, in an effort to
support its currency. This in turn is considered essential because (a)
Hungary wants to join the euro (b) there's great fear that a
devaluation of the forint would cause big debt problems, because so
much Hungarian private-sector debt is in other currencies -- euros, and
even Swiss francs.
About (a), I guess the question is at what price? About (b): there's a
major logical fallacy in this whole line of argument. I tried to point
it out in a post last year about Latvia; let me quote myself:
<begin quote>
Hugh puts his finger, in particular, on one gaping hole in the logic of
the opponents of devaluation. We can't devalue, they say, because the
Latvian private sector has a lot of debts in euros, and a devaluation
would make it very hard for borrowers to service those debts. As Hugh
points out, the proposed alternative -- sharp wage cuts, and basically
a major domestic deflation -- will also make it hard to service those
debts. In fact, I'd be a bit more specific than Hugh: other things
equal, a nominal devaluation and a real depreciation achieved through
deflation should have exactly the same effect on debt service (unless
some of the debt is in lats rather than euros, in which case
devaluation would do less damage.)
<end self quote>
This looks like events repeating themselves, the first time as tragedy,
the second time as another tragedy.
And it's not surprising that Hungary wants out.
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