I’m concerned about Europe. Actually, I’m concerned about the whole world — there are no safe havens from the global economic storm. But the situation in Europe worries me even more than the situation in America.and ends up like this:
For much of the past decade Spain was Europe’s Florida, its economy buoyed by a huge speculative housing boom. As in Florida, boom has now turned to bust. Now Spain needs to find new sources of income and employment to replace the lost jobs in construction. In the past, Spain would have sought improved competitiveness by devaluing its currency. But now it’s on the euro — and the only way forward seems to be a grinding process of wage cuts. This process would have been difficult in the best of times; it will be almost inconceivably painful if, as seems all too likely, the European economy as a whole is depressed and tending toward deflation for years to come.
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
Amen to that!
Meanwhile, Pedro Solbes has been talking about EU Bonds:
The euro zone is not yet ready for a joint bond but states in the 16-member currency area could coordinate their debt issuance more closely, a German newspaper on Wednesday reported Spain's economy minister as saying. 'I think the currency union is not yet ready for something like that,' Economy Minister Pedro Solbes, referring to the idea of a joint bond, told Germany's Handelsblatt in extracts of an interview to run in the business daily's Thursday edition.
So the argument isn't that they are not a good idea, it is that - with Spain's unemployment now at 3.5 million, and money starting to run out on the public works "stimulus programme" - we aren't yet ready for them. When will we be ready, when unemployment here hits 5 million, or six, or seven, or when we have 5 million people who have run out of INEM payments, or when things start to fall apart at eurozone level perhaps? Come on. Enough of all this passivity. Let's have some action up there. The issue is we set up a currency union without the necessary political architecture to make it work, so now we need to go to work on the architecture. Do our leaders have the mettle to finish the job, or, as Krugman fears, are they simply intent on proving all the skeptics right!
You can find some explanation of what EU Bonds are, and how they might work, in this post here.
Incidentally, he also gives this bit of background to his Spanish visit on his blog:
I’m in Yurp for a week, spending some time on other peoples’ problems (although in a way it’s all part of the same problem.) And one has to say that Europe has gotten itself into one heck of a mess, worse even than ours — because they have intractable adjustment problems on top of the general crisis.
As he says, we in Europe have some pretty intractable adjustment problems on our hands, or at least they are tractable, but we need to be bold enough. If we can't have the luxury of devaluation here in Spain, then we at least need to make sure a policy of sticking to the 2% inflation ECB price stability objective is implemented. Krugman's post also has some pretty useful argument and explanation about the current account deficit and unit labour costs, which are pretty much compatible with what I ahve been saying here, for those who have been following this blog.