Does the storied Nobel-awarded, Princeton prof whose column in the NYT is a beachead for his ideas that shape many discussion get it wrong on Europe? In FP.com, Anders Åslund makes the case why Krugman “just doesn’t understand Europe”:
Based on this facile analogue, Krugman concluded that Latvia would then have to devalue as Argentina had, but of course that didn\’t happen. The Latvian government ignored his advice. It stuck to its peg to the euro and carried out a draconian fiscal adjustment, which quickly restored confidence and prompted plenty of structural reforms; it is now the fastest growing economy in Europe. Krugman\’s mistake was to look at only a couple of indicators and draw a simplistic analogue.
Krugman\’s most spectacular failure has been his prediction of the dissolution of the eurozone. As Niall Ferguson has noted, Krugman \”wrote about the imminent break-up of the euro at least eleven times between April 2010 and July 2012.\” Well, that didn\’t happen. Not only did the eurozone remain intact but in 2009, Slovakia joined, as did Estonia in 2011; Latvia is set to join in January 2014.
While anyone can make a mistake, Krugman\’s error was more profound, indicating a lack of understanding. He treated the eurozone as primarily a system of fixed exchange rates, ignoring that it is a currency union with centralized clearing of payments. As the euro crisis evolved, uncleared payment balances piled up. The best way of dissolving these imbalances was by restoring confidence in the euro system, which the European Central Bank (ECB) has done, sensibly, since July 2012. A breakup of the eurozone, on the other hand, would have resulted in large debts and claims of the various members, leading to major financial destabilization.
via Paul Krugman’s Blind Spot – By Anders Åslund | Foreign Policy.