A fascinating interview with 2008 Nobel laureate Paul Krugman, in which he describes the last two possible solutions to the Euro crisis. Both are impossible.
He basically sees two possible outcomes, both of which are “impossible.”
One possibility is that the ECB aggressively buys peripheral debt and caps the borrowing costs of Spain and Italy, while simultaneously making it clear that they’re going to promote “expansionary monetary policies” that boost inflation in Germany and help restore competitiveness between Germany and the periphery.
“That can work… it’s still going to be extremely painful,” he says.
“Any solution is going to come out of Berlin and Frankfurt… Frankfurt will do the actual lifting, but has to have Berlin’s permission.”
But would Berlin actually sign off on an ECB-based debt monetization, pro-inflation scheme? That’s very un-German.
That gets to Krugman’s other possibility … Basically, eventually the ECB stops propping up all the banks (as they are now), and you get bank runs, bank holidays, and currency redenominations. That would mean the end of the euro system, which would then bring “cataclysmic” effects, both economic and legal.
You look at that scenario, says Krugman, and it seems impossible that the Germans would let the entire project disintegrate like this.
So what happens?
Read on. And don’d forget to vote here.