Eurozone Problems

Πηγή: NYT

Paul Krugman

I’m giving a talk in Paris tomorrow. Here are some slides; they won’t come as a shock to regular readers, but it may be useful to see them all in one place.

First, I make the case that the overall economic crisis is driven by private debt, not public debt:

Then I point to the huge swing of the private sector into financial surplus, which necessitated large public deficits to avoid a much deeper slump:

I then turn to Europe, which has the additional problem of a capital flow bubble from north to south induced by the euro, which has to be reversed:

The counterpart of these current account imbalances was a large divergence in relative price levels:

Implicitly, Europe is relying on “internal devaluation” to reverse this divergence. But the reality is that this is very hard given nominal rigidity, even in Ireland, which is wrongly held up as an example of successful adjustment:

Also, Europe has bought into the notion that fiscal irresponsibility is at the heart of the crisis, which is true only of Greece and not true of the troubled countries as a group:

And even on the IMF’s reckoning, none of the austerity countries is plausibly on the road to a tolerable fiscal situation: