Interview with economist Paul Krugman: 'Greece will leave eurozone within 12 months'


Ben Chu
Wednesday 30 May 2012 17:35
Paul Krugman
Paul Krugman

At last year’s Occupy Wall Street demonstrations in New York a superhero made his debut. He was a bearded figure called “Krug man”, who set about vanquishing the minions of the evil financial services empire with his fearsome “macro mallet”. The unlikely cartoon champion was based on Paul Krugman, the Nobel Prize winning economist.

In America, Krugman is the closest thing the economics profession has to a household name. His New York Times blog – which he uses to excoriate “austerian” politicians, arrogant European elites and economic folly in general – is one of the most popular sites on the web. Loath him or love him – and Krugman’s take-no-prisoners writing style has as many enemies as admirers · it is impossible to ignore him. And this week “Krug man” brought his battle for economic righteousness to the UK.

Speaking to The Independent today he was as forthright as ever. Krugman said he would be “astonished” if Greece managed to stay in the eurozone for longer than a year. The eurozone crisis was inevitable, he said, from the moment the Maastricht Treaty was signed in 1992. David Cameron is indulging in “wishful thinking” if he thinks Britain can cut its way back to growth. Oh, and a statue of Gordon Brown should be erected in Trafalgar Square to thank the former prime minister for keeping the UK out of single currency.

Will Greece leave the euro?

Something has to happen and in the end it does have to be a Greek exit. I’d be astonished if they can go more than two years without leaving. I’d be astonished if they could go even one year. The event that will force an exit is when the European Central Bank (ECB) puts a stop to the emergency lending to Greek banks. Nobody wants to do that but at some point the numbers will make that unavoidable. If I was a Greek depositor I’d be trying to shift money out of the banks because there’s a reasonable probability that, after a long weekend, you’ll find out that it has turned into a new drachma account worth 50 or 30 per cent less.

Would Greece actually be better off out?

The possibilities for a recovery are certainly there if Greece leaves. One of their major exports is tourism. Greece could exits creating a very ugly scene for six months or a year, but after that there’s tons of package tours of British lager louts going to the Greek isles. It sounds awful, but compared with 50 per cent youth unemployment, maybe not so bad. But there’s no certainty. Anyone who says I’m highly confident Greece would do well in the three years following devaluation – I don’t know that. But it’s not as if Greece is on a sustainable path now.

Should the rest of us fear the consequences of a Greek exit?

Greece essentially doesn’t matter except in terms of the knock-on effects on the eurozone. If Greece exits then we know that euro membership is non-irreversible. You then have a run on Spanish and Italian banks. That does not have to lead to an immediate crisis so long as the ECB is willing to supply the euros. But that also raises the question: where is the hope for recovery for those countries? They are also in an unsustainable situation unless there’s a change in policy that gives them a reasonable hope of a recovery in a five year period. So there’s a fork in the road. Will we see more ECB lending plus more expansionary fiscal policy and higher inflation targeting? Or will it be a complete eurozone break up? Both alternatives sound impossible but one of them has to happen. What will Germany in the end choose? It’s not Sophie’s Choice, but Germany’s choice.

Who should be held responsible for the eurozone crisis?

I think that the die was cast and the whole thing was pretty much fated from the moment the Maastricht Treaty [which paved the way for the single currency] was signed in 1992. Practically the entire European elite wanted that. There’s no one person who said: “Full speed ahead let’s do this”. Maybe the original sin goes all the way back to the European Coal and Steel Community [the first institution of European unity from 1952]. It was something that kind of had to happen.

David Cameron says austerity vs growth is a false choice. Is he right?

There is a choice. You could have a policy which is for austerity later but expansion now, but that’s not what he’s saying. No; if the Government is going to join in the private sector deleveraging [rapid deficit reduction] that’s going to harm the economy. The notion that you can somehow fudge that is wishful thinking.

Do you support a VAT cut, as Labour recommends?

There is always the problem that temporary tax cuts may be ineffective because they’ll be saved rather than spent. A VAT cut is a little bit funny because it also, in effect, creates the expectation of future inflation, so it might be more effective. But it’s a second best. Last year President Barack Obama pushed for extended payroll tax cuts, which was definitely not what I would have wanted by way of stimulus. But I was supportive of it anyway because it was something. So maybe that’s OK here. The Coalition plans do call for these really dramatic cuts in public investment and infrastructure spending – that almost certainly isn’t a good idea.

Does money printing by the Bank of England really help the economy?

The evidence is really thin. There’s probably something there, but it’s not something you really want to count on. That doesn’t mean don’t do it, but it’s not a guaranteed solution. I still think the prudent policy would be to rely on fiscal stimulus as the primary tool, but backed up by monetary policy. And if you can’t get the fiscal stimulus by all means let’s do the Quantitative Easing and cross our fingers.

Is the UK’s national debt too high?

It should have been paid down more. I think there is a fair charge that the Tony Blair/Gordon Brown years didn’t use the prosperity well. But it’s not as if they were wildly fiscally irresponsible. And this is the worst financial/economic crisis since the 1930s. It’s not as if we – in the UK or the US – are running these deficits on a whim. They are appropriate given the situation. This will not set the pattern of behaviour forever. All the evidence has been that the politicians are way too eager to reduce the deficit, rather than way too slow. The idea that they will continue to do deeply irresponsible budgeting even after the economy recovers is wrong.

Would Britain have been better off in the eurozone?

Wow! I suppose there’s always some argument people could make, but, my God! Cameron and Osborne love to claim credit for Britain’s low borrowing costs, but in fact those seem to be overwhelmingly the result of the UK not being in the euro. Even now, with everything going on, Spain’s fiscal prospects look no worse and maybe better than Britain’s and yet interest rates there are 6.6 per cent and 1.6 per cent here. I actually think they ought to put up statue to Gordon Brown in Trafalgar Square to thank him for keeping Britain out of the euro. It would have been an utter disaster if Britain had joined.

Did Gordon Brown “save the world” in 2008?

I think it’s arguably right. We now look back in those six months after Lehman Brothers failed [in October 2008] and policymakers did the right things. They did what was necessary to stop a complete financial collapse. We now talk as if that was fated to happen, but maybe not. Clearly it was Gordon Brown who moved first in doing the bank recapitalisation. Without that maybe the people who thought it was great idea to let Lehman fail to eliminate moral hazard might have continued to carry the argument for another couple of months, by which time it might have been irreversible.

Are you worried that, since the crash, many people simply don’t trust economists any more?

I guess I would be more disturbed if my colleagues had actually demonstrated that they deserve the trust! If [some economists] are going to come out in 2009 and predict runaway inflation and show absolutely no reduction in self-confidence three years later when the runaway inflation is showing absolutely no sign of materialising then the public shouldn’t trust economists. They should trust me!

End this Depression Now! By Paul Krugman is published by W. W. Norton & Co.

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