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Ruinous Policies Plunge Portugal into Despair

Paul Krugman: How can it possibly make sense to condemn vast numbers of willing workers to unemployment?

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The Financial Times recently published a long, deeply depressing portrait of conditions in Portugal, focusing on the plight of family-owned businesses — once the core of the nation’s economy and society, but now going under in droves.

This is what it’s really about.

And anyone playing any role in our current economic debate, whether as an actual policy maker or as an analyst giving advice from the sidelines, should be focused, above all, on how and why we’re allowing this nightmare to happen all over again, three generations after the Great Depression.

Don’t tell me that Portugal has had bad policies in the past and has deep structural problems. Of course it has; so does everyone else. And while Portugal’s problems are arguably worse than those of some other countries, how can it possibly make sense to deal with these problems by condemning vast numbers of willing workers to unemployment?

The answer to the kind of problems Portugal now faces, as we’ve known for many decades, is expansionary monetary and fiscal policy. But Portugal can’t do those things on its own, because it no longer has its own currency. O.K., then: either the euro must go or something must be done to make it work, because what we’re seeing (and Portuguese people are experiencing) is unacceptable.

What could help? A much stronger economic expansion in the euro zone as a whole; higher inflation in the European core.

Looser monetary policy could help achieve these things, but bear in mind that the European Central Bank, like the Federal Reserve, is basically up against the zero lower bound. The E.C.B. can and should try to push unconventional policies, but it needs as much help as possible, rather than this situation in which austerity in the periphery is reinforced by austerity in the core, too.

What Portugal and the other periphery countries are feeling the effects of instead, however, is three years of European policy focusing almost entirely on the supposed dangers of public debt. I don’t think it’s a waste of time to discuss how that misplaced focus happened, including the unfortunate role played by some economists who have done fine work in the past and will presumably do fine work in the future.

But the important thing now is to change the policies that are creating this nightmare.

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