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Greenspan Blames the Victims of Europe’s Woes

(CartoonArts International / The New York Times Syndicate )


Greenspan Blames the Victims of Europe’s Woes

(CartoonArts International / The New York Times Syndicate )

Alan Greenspan, the former chairman of the Federal Reserve, has written another deeply misleading, destructive op-ed. Also, the sun rose in the east.

In a commentary article for The Financial Times headlined “Europe’s Crisis Is All About the North-South Split,” published on Oct. 6, Mr. Greenspan writes: “Northern Europe in effect has been subsidizing southern European consumption from the onset of the euro on January 1, 1999. It is not a recent phenomenon.”

Mr. Greenspan is quickly establishing himself as the worst ex-Fed chairman of all time. But since he has introduced a brand new fallacy into the debate, it’s worth taking on.

One of the big problems in coming to any rational response to the euro crisis has been the insistence of key players, especially but not only in Germany, of seeing it as a morality play: spendthrift, irresponsible politicians brought it on through budget deficits. It has been very hard to get across the point that this is a Greek story only; that Spain and Ireland actually had budget surpluses and low debt on the eve of the crisis.

What Mr. Greenspan does is to introduce a whole new fallacy: He takes the rise in southern European costs and prices during the run-up to the crisis as a sign of moral turpitude. “From 1990 through to the end of 1998, euro-south unit labor costs and prices rose faster than in the north,” Mr. Greenspan wrote. “In the years following the onset of a single currency, that pace barely slowed. In fact, the underlying trend was stopped only by the financial crisis of 2008. Since then there have been signs of price level stabilization in the north and the south.”

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Gosh, why should wages and prices have risen faster in, say, Spain than in Germany?

Hello? There was a huge boom in Spain, driven by housing and financed by large private — not public — capital inflows. Of course wages and prices rose. And it’s really hard to see what, short of either imposing capital controls or leaving the euro, Spanish officials could have done to stop it.

I understand that some people really, really want to blame the victims here. But that doesn’t make it right.


The German blogger Kantoos recently published a righteous rant about the European Central Bank and the destructiveness of its tight-money obsession.

“There is absolutely no excuse for the current destructive monetary policy of the E.C.B.!” Kantoos writes.

He’s right: if the euro cracks up, the E.C.B. will bear a large share of the blame.

The E.C.B.’s actions are in fact destructive on two levels. First, it’s now completely clear that the recent rate hikes completely repeated the mistake of 2008, when the E.C.B. reacted to an obviously temporary spike in commodity prices by raising rates, even as the economy was sliding into recession. It’s truly remarkable that it would do exactly the same thing again. As Kantoos says, both core inflation and market expectations of inflation say that there is no threat to price stability.

Beyond that, too-low inflation is catastrophic in the euro context. I tried to explain that a while back: Given the evident need of Spain and other countries for a large decline in relative prices, a low overall euro area inflation rate means destructive deflation in the periphery. By pursuing policies that have the market expecting only a bit more than 1 percent inflation over the next five years, the E.C.B. may well have doomed the whole euro project.

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Paul Krugman joined The New York Times in 1999 as a columnist on the Op-Ed page and continues as a professor of economics and international affairs at Princeton University. He was awarded the Nobel in economic science in 2008.

Mr Krugman is the author or editor of 20 books and more than 200 papers in professional journals and edited volumes, including “The Return of Depression Economics” (2008) and “The Conscience of a Liberal” (2007). Copyright 2011 The New York Times.

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