BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Krugman's Right: The Euro Was The Original Mistake, Vote No For Greek Recovery

This article is more than 8 years old.

It's not exactly a secret that Paul Krugman hasn't been a great fan of the euro over the years. In fact, most economists haven't been great fans of it: it has always been the political classes urging it on. So, the question now becomes, with the situation in Greece, what should be done next? And the answer is almost certainly to encourage a no vote at the upcoming referendum. That would seal the idea that Greece just will not continue within the eurozone and at that point we would almost certainly see signs of life in the Greek economy once again. And that is actually the aim of whatever policy is followed now. The heck with European unity and all that jazz: the task is to get some growth back into that Greek economy, get people back to work. Seriously, a 50% youth unemployment rate is evidence of little else than all out economic war. So, let's stop doing that and go and do something useful and sensible instead.

Here's the opening of Krugman's column:

It has been obvious for some time that the creation of the euro was a terrible mistake. Europe never had the preconditions for a successful single currency — above all, the kind of fiscal and banking union that, for example, ensures that when a housing bubble in Florida bursts, Washington automatically protects seniors against any threat to their medical care or their bank deposits.

Yep, entirely so, and many economists (and others, like myself) have been saying this all along. It doesn't and didn't matter how much people praised this idea of ever more Europe, the currency, as designed, was simply not going to work over the area it was planned to introduce it over. And it's worth noting that there really were many economists who were saying this.

Here's a quite gorgeous paper from the European Commission. It's from 2009, and it's a look back at what American economists were saying about the euro from 1989 to 2002. The tone is most fun: they're dancing along, tooting their horns, shouting that well, the Yankees didn't think it would work! And yet here we are in 2009 and we've still got our lovely euro!

The euro: It can’t happen, It’s a bad idea, It won’t last.
US economists on the EMU, 1989 - 2002

Schadenfreude on those celebrating their own schadenfreude is so much fun, isn't it?

We should note that Krugman was on the right side in all of this. And he also asks the right question: well, what should be done next?

Clearly, though, some decisions now have to wait on the referendum.

I would vote no, for two reasons. First, much as the prospect of euro exit frightens everyone — me included — the troika is now effectively demanding that the policy regime of the past five years be continued indefinitely. Where is the hope in that? Maybe, just maybe, the willingness to leave will inspire a rethink, although probably not. But even so, devaluation couldn’t create that much more chaos than already exists, and would pave the way for eventual recovery, just as it has in many other times and places. Greece is not that different.

Quite so. His headline pun is also fun, for he calls this "Grisis" which sparked a vague memory in me:

Grisi siknis (in Miskito language, from the English, means "crazy sickness") is a contagious, culture-bound syndrome

Sounds like a pretty good description of what's been going on really. But on to weightier matters. What we really want to happen is for there to be some growth in the Greek economy, something to relieve the human suffering:

So there is no doubt that the future looks very bleak for the Greek economy, but there are also good arguments that all this actually might mark the beginning of a Greek economic recovery in the same way the Argentine default and devaluation in January 2002 was the beginning of a sharp recovery in Argentine growth in from 2002 to 2007.

Quite so, if what ails you is towering debt and an overvalued currency then the solution is default and devaluation:

There was a simple “solution” to this problem – Argentina should give up the currency board and devalue. That happened in early 2002.

Even though the contraction in the Argentine economy continued in the first couple of quarters after the devaluation growth soon picked up and in fact Argentine real GDP growth in the period 2003-2007 averaging nearly 8.5% per year. Obviously we should not forget that GDP dropped 10% in 2002, but that was essentially the impact of the banking crisis that played out ahead of the devaluation rather than a result of the devaluation.

I think that we very well could be in for a very similar development in Greece if the country indeed leaves the euro area.

Greece isn't going to be exactly the same as Argentina but it's worth noting that the Argentine growth did not, to any great extent, depend upon export led growth. It was actually all about a revival of domestic demand once the harrowing austerity was removed. And that does sound a lot like Greece.

The euro itself was a bad idea, Greece should never have joined it. The solution to Greece's woes is to leave the euro. And don't forget, this isn't some strange heterodox set of economics being used here. This is absolutely standard, straight down the line, analysis. And it's exactly what the IMF would have prescribed for the Greece if it hadn't been in the euro back in 2010. Default and devalue. Today the damage is already done so why not finally do the right thing? Vote no, get out of the euro and get back to economic growth.

Check out my website