This Is The Way The Euro Ends

NYT

P. Krugman

This is the way the euro ends.

This is the way the euro ends.

Not with a bang but with bunga-bunga.

Seriously, with Italian 10-years now well above 7 percent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable:

A eurozone built on one-sided deflationary adjustment will fail. That seems certain. If the leaders of the eurozone insist on that policy, they will have to accept the result.

Every even halfway plausible route to euro salvation now depends on a radical change in policy by the European Central Bank. Yet as John Quigginsays in today’s Times, the ECB has instead been part of the problem.

I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind.

I still find it hard to believe that the euro will fail; but it seems equally hard to believe that Europe will do what’s needed to avoid that failure. Irresistible force, meet immovable object — and watch the explosion.