Krugman: Arrogance of elites caused economic crises in Spain and Greece

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...

The EU has always been a tool of the elites, on the right and left. The average European citizen could care less about the EU.

K&R

I mean who else? What do they get paid all that money for if not to prevent this sort of crap?

Krugman is obviously right about many points. Perhaps many European nations were not ready for the unification of the Euro. Perhaps they would never be ready. And Krugman is also right in pointing out that much of Spain and other European nations problems originated from the outside, namely Wall Streets derivative madness. But I don't think that Krugman is right about the general point that European nations have been spending too much and being fiscally irresponsible. Look at Britain as an example. Britain's problems haven't originated with the Euro. Britain, like many other nations is spending more money than they are taking in and they are running massive budget deficits. True, like the U.S., much of the current deficit can be traced to the battle against an economic depression. But even before the current crisis, much of Europe was on a fiscally unsustainable path, just as Japan and the U.S. was on.

As a believer in a democratic form of government, it is very disconcerting to see a large percentage of the democratic world stuck in economic doo doo. Many, if not most western democratic nations have been living beyond our means for years. We spend too much and/or tax too little. In the case of Europe, with taxes comparatively high, it would be hard to argue that they are taxed too little. In the case of the U.S., where taxes are comparatively low, it would be hard to argue that the U.S. isn't both spending too much and taxing too little. In any case my point is that western democracies are showing themselves to be incapable of managing their budgets and economies responsibly. Liberal economists like Krugman, just want to pile on debt on top of more debt, with an end game no one can really see. As a moderate democrat, I believe fiscal responsibility should have always been the highest priority. We should be spending less and taxing more. Unless we learn how to live within our means soon, the 21st century will belong to authoritarian capitalist nations, like China, who will soon own us.

they own only about 10% of our debt despite what the media makes you think. Ohh and here is a little secret...china also has a national debt. Plus with china we don't know the real story (there are rumors that there financial system is riddled with sour loans but they are shoving it under the rug)

leveraging is now seen as an okay form of fiscal policy by almost all nations

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
(in billions of dollars)
HOLDINGS 1/ AT END OF PERIOD


Nov Oct Sep Aug Jul Jun May Apr Mar Feb Jan Dec Nov
Country 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2009 2008 2008
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------

China, Mainland 789.6 798.9 798.9 797.1 800.5 776.4 801.5 763.5 767.9 744.2 739.6 727.4 713.2
Japan 757.3 745.9 751.0 730.6 723.9 711.2 677.2 685.9 686.7 661.9 634.8 626.0 625.2
United Kingdom 2/ 277.5 230.1 248.8 226.4 219.4 213.4 163.7 152.7 128.1 129.0 123.9 130.9 132.4
Oil Exporters 3/ 187.7 188.4 185.3 189.2 189.3 191.2 192.9 189.6 192.0 181.8 186.6 186.2 187.2
Carib Bnkng Ctrs 4/ 179.8 170.6 173.0 181.3 194.5 191.0 195.2 205.1 214.0 189.5 176.9 197.5 205.0
Brazil 157.1 156.2 144.9 137.3 138.1 139.8 127.1 126.0 126.6 130.8 133.5 127.0 136.1
Hong Kong 146.2 142.0 132.2 124.7 115.3 99.8 93.2 80.9 78.9 76.3 71.7 77.2 70.6
Russia 128.1 122.5 121.8 121.6 118.0 119.9 124.5 137.0 138.4 130.1 119.6 116.4 108.0
Luxembourg 91.7 91.0 99.0 94.4 92.2 104.3 96.2 97.4 106.0 92.1 87.0 97.3 94.2
Taiwan 78.4 78.7 78.1 75.9 77.4 77.0 75.7 78.3 74.8 72.6 73.3 71.8 70.2
Switzerland 75.8 71.5 68.9 68.2 68.1 71.5 63.7 64.2 67.7 68.2 62.1 62.3 63.8
Germany 53.6 52.9 53.7 55.0 56.1 53.8 55.1 54.4 54.9 56.5 56.2 56.0 53.8
France 47.5 36.2 32.0 35.0 24.6 26.0 25.9 30.6 27.1 16.8 17.9 16.8 18.4
Canada 46.6 40.3 37.7 25.7 19.6 18.4 11.0 12.5 11.3 10.3 8.4 7.8 12.7
Korea, South 39.1 42.2 38.8 38.7 37.6 36.3 37.4 35.4 33.1 33.3 31.3 31.3 32.7
Ireland 38.8 38.3 32.7 36.6 38.7 46.3 50.6 49.7 54.7 54.5 50.0 54.3 41.3
Singapore 36.4 35.2 38.3 42.0 42.3 40.8 39.6 39.7 39.1 39.3 38.3 40.8 38.7
Thailand 31.7 30.1 30.1 33.5 31.4 29.7 26.8 28.5 26.0 39.7 37.2 32.4 33.9
India 31.6 32.9 35.9 38.5 38.9 39.3 38.8 38.5 38.2 34.6 32.5 29.2 22.3
Turkey 29.6 30.4 28.2 28.7 27.3 27.5 28.8 27.2 30.2 32.4 31.3 30.8 29.0
Norway 26.2 24.9 25.2 24.7 28.9 28.7 28.3 27.5 26.2 21.1 21.9 23.1 20.2
Mexico 26.2 20.7 22.1 27.5 27.7 29.5 31.5 35.3 36.2 37.8 34.8 34.8 33.8
Egypt 25.3 20.2 20.8 20.4 18.6 17.3 18.6 18.5 18.5 19.1 16.9 17.2 16.8
Netherlands 20.3 19.8 21.3 21.4 21.5 18.9 16.4 16.5 17.6 16.1 16.8 15.4 15.6
Sweden 19.4 19.2 18.3 16.7 16.5 16.4 13.0 12.7 12.5 12.6 12.4 12.7 13.1
Italy 19.1 19.1 17.6 16.9 17.3 16.7 16.7 16.1 16.6 16.4 15.6 16.0 15.9
Israel 16.6 16.0 18.3 17.7 17.0 18.1 19.0 19.1 19.4 17.4 16.9 18.8 13.8
Colombia 15.6 16.8 16.8 16.4 14.9 11.8 12.0 11.5 11.3 11.5 11.4 11.1 11.5
Belgium 15.3 14.7 15.0 15.6 15.7 15.7 15.7 15.8 15.4 14.5 15.5 15.9 15.3
Chile 12.2 12.5 12.9 13.0 13.5 14.3 14.7 15.1 15.5 15.2 15.2 15.2 15.1
Philippines 12.2 11.9 11.8 12.4 11.4 11.6 11.8 12.0 12.4 12.6 11.6 11.7 11.5
Australia 11.5 10.5 10.1 10.2 9.8 9.9 9.0 8.4 5.8 8.1 7.8 9.3 8.7
Malaysia 11.1 11.0 11.0 11.2 11.9 11.7 12.3 11.6 10.6 8.4 8.0 8.4 8.8
All Other 142.3 146.4 146.7 148.5 149.7 147.5 148.6 145.0 150.7 156.7 154.5 147.0 147.4
Grand Total 3597.5 3498.1 3497.4 3453.1 3427.5 3382.1 3292.6 3262.1 3264.6 3161.5 3071.5 3075.9 3036.0

Of which:
For. Official 2404.6 2384.8 2369.4 2360.0 2346.1 2295.7 2287.5 2253.6 2248.6 2198.1 2165.8 2138.7 2104.1
Treasury Bills 586.6 598.0 597.7 607.3 606.6 571.9 586.2 530.6 542.7 521.2 486.9 457.9 427.2

"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."

If I recall, Italy was a big concern when the new world order of trade-block corporatist alliances came to be. Northern Europe was concerned over labor and wage inequalities. Now I wonder if it was a smoke screen.