PAUL KRUGMAN: Germany turned Europe's problems into a 'morality play'

Paul Krugman is going after Germany’s austerity policy again.

In a recent interview with Business Insider Deutschland’s editor-in-chief Christin Martens, the Nobel Laureate detailed what he believed to be the worst effects policy pursued by Europe’s largest economy.

Krugman argued that the ramifications of the policy run “very deep” — but that it’s not just a huge cost in terms of lost output and lost jobs.

“Years of terrible economic performance have also done enormous damage to the European project and have basically left Europeans no longer believing in the whole message,” he said.

“The cost has been enormous.”

Notably, he suggested that the austerity policy ended up being not just about economics, but also somewhat about a moral “right versus wrong” debate.

As Krugman told BI:

“Once the bubble burst, there was going to be a difficult time for the Euro, regardless. But it’s been far worse than it needed to be and Germany bears some of the responsibility because of turning what should have been viewed as essentially a technical economic problem into a morality play. That has been a very unfortunate story. …

Austerity policies have taken what was fundamentally a story about excessive private capital flows and housing bubbles and turned it into lectures of fiscal responsibility that have ended up doing a lot of damage.”

Regarding Greece specifically, Krugman argued that a sustainable alternative would have been a large reduction in the face value of its debt early on and a large private sector haircut. Additionally, Greece needed a guarantee of liquidity so there wouldn’t be runs on its debt.

“Greece was going to have to do a fair amount of austerity but not this much. In the end it would still have been ugly, but not on this level,” Krugman told BI.

“What could have mitigated the damage? The thing is that what has actually happened has not worked. Greece is still in the Euro. There’s a little bit of economic growth but at the cost of an incredible slump. The ratio of debt to GDP is higher than ever.

“All of this austerity has not only not resolved the fiscal problem, it hasn’t even moved it in the right direction.”

Check out Business Insider’s full interview with Paul Krugman here.

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