The . . . core economic problem is that costs and prices have gotten out of line with those in the rest ofStiffing those foreign creditors who were foolish enough to lend in pesetas, of course. But hey, they’re wealthy bankers. Of course, the obvious problem with this “painless” solution is that the peseta might not go down 20 percent. It might get dumped in a wave of panic selling and go down 90 percent. Along with the drachma and the lev and the forint and all the other folk-dance coinage from the European fringe.
Europe. If still had its old currency, the peseta, it could remedy that problem quickly through devaluation — by, say, reducing the value of a peseta by 20 percent against other European currencies. But Spain no longer has its own money, which means that it can regain competitiveness only through a slow, grinding process of deflation. Spain
Getting it Wrong with Krugman
Paul Krugman’s latest in the New York Times is that the euro was a blunder. Focusing on the problems in
(conceding that the Greek crisis really was, at least in part, caused by government profligacy) Krugman writes that Spain Spain and would then have to pay for imports – including stuff like oil, which they kind of need and kind of don’t produce – in dollars or Deutsche Marks, thereby throwing their own economies into an oil-shock recession while running down their foreign currency reserves. Which means that sooner or later (guess which) they would run into trouble paying back those foreign lenders who were foolish enough to lend in real money.This would then spread the contagion – like the Asian currency upset and Russian defaults in 1998 which wiped out Long-Term Capital and almost transmitted the crisis to the Greece . Tottery banks would see more of their assets – loans to peripheral US Europe – impaired or wiped out. No, there’s nothing wrong with a lot of itty-bitty currencies and lots of cross-border lending. Except international speculators trying to screw everything up. Doubtless the Krugster would be all over them.
Posted by wage