Krugman on European Financial Suicide

[David Morris]

So if European leaders really wanted to save the euro they would be
looking for an alternative course.  And the shape of such an
alternative is actually fairly clear. The Continent needs more
expansionary monetary policies, in the form of a willingness — an
announced willingness — on the part of the European Central Bank to
accept somewhat higher inflation; it needs more expansionary fiscal
policies, in the form of budgets in Germany that offset austerity in
Spain and other troubled nations around the Continent’s periphery,
rather than reinforcing it. Even with such policies, the peripheral
nations would face years of hard times. But at least there would be
some hope of recovery.

What we’re actually seeing, however, is complete inflexibility. In
March, European leaders signed a fiscal pact that in effect locks in
fiscal austerity as the response to any and all problems. Meanwhile,
key officials at the central bank are making a point of emphasizing
the bank’s willingness to raise rates at the slightest hint of higher
inflation.

So it’s hard to avoid a sense of despair. Rather than admit that
they’ve been wrong, European leaders seem determined to drive their
economy — and their society — off a cliff. And the whole world will
pay the price.