Why Europe is in Trouble

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Ben Cohen
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By Ben Cohen

Paul Krugman explains why Europe is potentially in more trouble than the U.S:

Many economists, myself included, have argued that the Obama


administration’s stimulus plan is too small, given the depth of the


crisis. But America’s actions dwarf anything the Europeans are doing.The


difference in monetary policy is equally striking. The European Central


Bank has been far less proactive than the Federal Reserve; it has been


slow to cut interest rates (it actually raised rates last July), and it


has shied away from any strong measures to unfreeze credit markets.

According to Krugman, the fragmented European system of banking (there is no strong central bank) is leading to incoherent and inadequate action to combat the deepening recession. The consequences, he warns, could be catastrophic. Taking Spain as an example, Krugman paints a picture of the future:

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.

I do take issue with Krugman's berating of European unwillingness to follow America's example - he writes:

Why is Europe falling short? Poor leadership is part of the story.


European banking officials, who completely missed the depth of the


crisis, still seem weirdly complacent. And to hear anything in America


comparable to the know-nothing diatribes of Germany’s finance minister


you have to listen to, well, Republicans.

Given the U.S created the crisis in the first place, it is a little harsh. But unfortunately, I don't think he's wrong either.