Krugman on European Financial Suicide

[David Morris]

http://www.nytimes.com/2012/04/16/opinion/krugman-europes-economic-suicide.html?_r=1&ref=opinion#

Consider the state of affairs in Spain, which is now the epicenter of
the crisis. Never mind talk of recession; Spain is in full-on
depression, with the overall unemployment rate at 23.6 percent,
comparable to America at the depths of the Great Depression, and the
youth unemployment rate over 50 percent. This can’t go on — and the
realization that it can’t go on is what is sending Spanish borrowing
costs ever higher.

In a way, it doesn’t really matter how Spain got to this point — but
for what it’s worth, the Spanish story bears no resemblance to the
morality tales so popular among European officials, especially in
Germany. Spain wasn’t fiscally profligate — on the eve of the crisis
it had low debt and a budget surplus. Unfortunately, it also had an
enormous housing bubble, a bubble made possible in large part by huge
loans from German banks to their Spanish counterparts. When the bubble
burst, the Spanish economy was left high and dry; Spain’s fiscal
problems are a consequence of its depression, not its cause.

Nonetheless, the prescription coming from Berlin and Frankfurt is, you
guessed it, even more fiscal austerity.

This is, not to mince words, just insane. Europe has had several years
of experience with harsh austerity programs, and the results are
exactly what students of history told you would happen: such programs
push depressed economies even deeper into depression.