Krugman on the Future of the Euro

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The January 16 New York Times Sunday magazine has a long article by Paul Krugman discussing the history and future of the euro.  I’ll excerpt the conclusions here, but the article itself really deserves to be read.  Click here for a direct link.

What does the future hold for the euro?  Here are the options outlined by Prof. Krugman:

(1) Toughing it out
(2) Debt Restructuring
(3) Full Argentina
(4) Revived Europeanism

If you want to know more, read the article.  Make sure you’re sitting down and in a comfortable chair.

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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.

4 Replies to “Krugman on the Future of the Euro”

  1. Zhi Huang

    Hello Dr. Lima, I am just wondering what your take is on the currency condition of the Euro debt crisis. It seems there’s no easy way out of it. The status quo, Euro countries, namely Germany, keep giving loans to Greece has not worked. But the alternative, partial or full default, seems worse. If Greece is allowed to restructure its debts, many European banks with Greek bonds would suffer
    horrendous losses. Not to mention many of them sold Credit Default Swaps insuring such debt. Facing such a huge hit, Europe could face a credit crunch of its own, similar in scale to the post Lehman crisis. Ireland, Portugal and Spain could see their bond yields shoot up the sky. Euro could slump, and US dollar would rise, which would lead to the fall of commodities and all risky assets, including stocks. US exports would suffer as a result. It’s not surprising that the ECB is fiercely oppose to any kind of restructuring. But without it, we can never get to the bottom of Greece’s solvency problem. Please share your thoughts on this issue. Thanks.

  2. admin

    Zhi, there is very little I can add to your excellent summary of the situation. Except for the fact that you forgot Italy (debt to GDP ratio over 100%), you’ve nicely described the dilemma facing eurozone governments (not to mention the ECB).

    One item I’m worried about that no one seems to have mentioned is the exposure of U.S. banks to Greek (and other) government debt. Most big U.S. banks have a substantial presence in Europe. Do their European subsidiaries also own vast quantities of this junk?

    In the coming weeks I hope to be able to investigate this a bit.

  3. Zhi Huang

    Thanks for your input. I remember reading something about Italy’s finance minister being able to stabilize the financial condition of the country, for the time being at least. That’s why the market has so far been forgiving to Italy.

    I just read the news that Europe fails yet again to agree on what to do with Greece. It’s certainly one of those “damned if you do, damned if you don’t” kind of predicaments.

    “The Economist” has been bearish all along about the recovery. Many times in 2010 we saw moments which seemed like we were about to slump again, such as fear of a double-dip, Euro zone crisis, the possibility of deflation, only to come out unscathed. But this time it looks like we have a combination of all of the above, plus some: the lose of steam of the recovery, sticky unemployment, kicking in of the healthcare and financial reform acts, cooling off of the emerging markets, a stock market which has doubled since its trough and nearing its historic height. The Euro crisis might just be the trigger for another round of trouble. May God help us.

  4. Zhi Huang

    Accorind to Bloomberg, Bernanke has made the following announcement regarding how much exposure US banks have when it comes to Greece, Ireland and Portugal,

    “We have asked the banks to essentially do stress tests and ask, looking at all their positions, all their hedges, what would the effect on their capital be if — if Greece defaulted,” Bernanke said to reporters today at a press conference after a meeting of the Federal Open Market Committee. “The answer is that the effects are very small…With very few exceptions, the money-market mutual funds don’t have much direct exposure to the three peripheral countries which are currently dealing with debt problems.” So I suppose a Greek default would not be too bad for US.

    I am just wondering if “kicking down the bucket” would actually be better for Greece, so that it could restructure at a more opportune time, when European countries and America’s economies are on a more solid footing so as to minimize the impact?