Friday, April 30, 2010

Op-Ed Columnist - The Euro Trap - NYTimes.com


Paul Krugman in the New York Times this AM with a good piece on the mess in Europe. If you're curious as to why you should care about problems across the Atlantic Ocean, this is a good read.

Here's the most relevant sector, in my opinion:

What’s the nature of the trap? During the years of easy money, wages and prices in the crisis countries rose much faster than in the rest of Europe. Now that the money is no longer rolling in, those countries need to get costs back in line.

But that’s a much harder thing to do now than it was when each European nation had its own currency. Back then, costs could be brought in line by adjusting exchange rates — e.g., Greece could cut its wages relative to German wages simply by reducing the value of the drachma in terms of Deutsche marks. Now that Greece and Germany share the same currency, however, the only way to reduce Greek relative costs is through some combination of German inflation and Greek deflation. And since Germany won’t accept inflation, deflation it is.

The problem is that deflation — falling wages and prices — is always and everywhere a deeply painful process. It invariably involves a prolonged slump with high unemployment. And it also aggravates debt problems, both public and private, because incomes fall while the debt burden doesn’t.




Op-Ed Columnist - The Euro Trap - NYTimes.com