Paul Krugman’s Blind Spot – By Anders Åslund | Foreign Policy

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, 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.


2 thoughts on “Paul Krugman’s Blind Spot – By Anders Åslund | Foreign Policy”

  1. I wish that the many Econ classes I’ve taken throughout the (long) course of my IR major could help me better understand fiscal policy and what it has done in the EU. Alas, as I struggled in many an Econ class, I now struggle to understand the economic details of this article. I do know this, though. Economics is a social science that can only go so far in predicting the future, partly because it is a relatively new science that is still encountering unforeseen phenomena that needs to be studied and understood; partly because conducting experiments to try to create models of prediction would be extremely costly; and partly because there are human beings running Adam Smith’s invisible hand, and human beings are often unpredictable. I mean, when we hit the section on utility I had to chuckle and shake my head. Really, econ? We’re trying to measure people’s happiness? No wonder economists are often accused by other scientists of often being a little detached from reality. But that’s clearly going on a tangent. Another thing I know about econ is that equally renowned and educated economists often disagree with each other, as is the case here. It happens a lot. Given my limited knowledge I am obviously not one to determine which one seems more correct than the other, but it is important to understand the region being studied at many different levels. Making statements about countries like Luxembourg and Latvia without fully understanding the political and economic mentality of those particular countries is an uneducated guess at best.
    It’s interesting to note that Southern European countries have been adopting Krugman’s economic advice. I guess economic advisors are listened to after all.

  2. Let’s place this article in context. First of all, why write an article over Krugman in the first place? Answer: Mr. Krugman just wrote a very controversial article blaming the hardships of Southern European economies on the relative success of Northern European economies. This idea is politically toxic to a Europe that is already facing a wave of nationalist parties seeking to undermine the power of Brussels, and must be discredited by Europeans who seek to preserve the Euro. There have been a stream of articles attempting to discredit Mr. Krugman’s argument, here are links to Mr. Krugman’s article, and a defensive response.

    Mr. Krugman’s offending article:

    A response:

    Mr. Aslund claims that voters in the “successful” countries like Latvia or Sweden voted for austerity measures, and that it is purely structural reform that has lead to the revival of their economy, while failing to mention that there are growing nationalist movements in struggling euro states that are a direct result of austerity measures enforced upon those states by the EU and the IMF.

    Quote, “Luckily for European democracies, the ultimate verdict on crisis management belongs to the voters. During the five years from October 2008 until September 2013, eight EU governments — in Estonia, Finland, Germany, Latvia, Luxembourg, the Netherlands, Poland, and Sweden — have been reelected, hanging onto power even in the face of economic crisis. These governments were the ones that pursued responsible fiscal policies often called austerity, contrary to the policies Krugman prescribed.”

    Really Mr. Aslund? That’s convenient coming from a Swedish economist; a part of the “northern countries” that Krugman claims is benefiting from the artificially weakened euro. There’s no mention anywhere of the voters that have been throwing their governments out because they tried to reform their economies too quickly. Last month Portugal just had their local elections and the ruling Social Democrats lost in a humiliating defeat to the Socialist anti-austerity party by a margin of 18%! The austerity measures Mr. Aslund praises here have not been so popular in the south.

    As for the survival of the Eurozone, it’s still unclear if the EU’s survival was based entirely upon economics; perhaps the EU was saved because member states felt that the need for political unity within Europe outweighed the need for greater economic efficiency. Countries like Spain, Italy, Greece, and Portugal are still staggering a long, with barely any growth at all despite severe austerity forced upon them by Brussels. Mr. Aslund’s argument does not even directly combat Mr. Krugman’s call for increased governmental spending, instead he dodges the question entirely by placing increased governmental spending in the sphere of impossibility.

    Finally, Mr. Aslund’s criticism of Mr. Krugman’s focus on aggregate demand hardly addresses the pre-existing structural problems that existed within Southern European countries prior to their collapse in 2009. The Northern EU nations that Mr. Aslund praises for their rapid recoveries were not as exposed to the housing market bubble as the Southern European Nations, particularly Spain.

    While Mr. Aslund is right to take Mr. Krugman to task on his failure to recognize the significance and effectiveness of government led structural reform, he fails to address the serious implications of Mr. Krugman’s claims of “beggar-thy-neighbor” trade policy, he only attempts to divert our attention elsewhere.

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