I’m a little late noting Paul Krugman’s column last Thursday that makes some good points about the European debt crisis.
One is that the countries hurting the worst tend to be those with lax regulations and relatively weak (for Europe) social safety nets. Sweden, by contrast, is booming. That’s not necessarily cause-and-effect, but it does knock down notions that social programs are to blame for the crises in Greece and Italy.
Another is that interest rates on government debt depend in large part on whether a country can borrow in its own currency. Japan is deeper in debt than Italy, and the UK economy looks worse than that of Spain, but the Japanese and British governments pay only about 1 or 2 percent on long-term bonds in yen or pounds, while Italy and Spain have to offer investors 6 or 7 percent for bonds in Euros.
(Krugman doesn’t mention it here, but some short- and intermediate-term U.S. Treasury instruments actually pay negative interest in inflation-adjusted terms. And while it’s true that central banks such as the Fed can drive down rates by buying up bonds, the fact is that the U.S., Japan, and Britain have no trouble selling bonds at these rates to private foreign and domestic investors as well, meaning that the free market essentially approves the low bond rates for Britain, Japan, and the United States.)
The other thing you need to know is that in the face of the current crisis, austerity has been a failure everywhere it has been tried: no country with significant debts has managed to slash its way back into the good graces of the financial markets. For example, Ireland is the good boy of Europe, having responded to its debt problems with savage austerity that has driven its unemployment rate to 14 percent. Yet the interest rate on Irish bonds is still above 8 percent — worse than Italy.
The moral of the story, then, is to beware of ideologues who are trying to hijack the European crisis on behalf of their agendas. If we listen to those ideologues, all we’ll end up doing is making our own problems — which are different from Europe’s, but arguably just as severe — even worse.