Economist Paul Krugman took to Reddit yesterday to hold a live online Q&A session, where participants could ask him anything they wanted.You can see all his answers right here, though there are a couple in particular worth highlighting.
One questioner asked him whether Europe was repeating the mistake that Britain did, when, at the recommendation of The Treasury, went on the gold standard.
All around Europe’s periphery they’re doing it as we speak, er, type. The euro has served as the functional equivalent of the gold standard.
The difference for, say, Spain is that since they don’t have their own currency, it’s much harder to change course than it would have been for Britain under gold. But if you look at, say, Latvia, they’re doing the full Churchill — and being hailed as a role model even as they enforce a devastating slump on themselves.
So basically, because the gold standard is reversible (something that goldbugs don’t like to admit) it’s actually preferable to the Euro, which has proven itself very difficult to get out of.
As for fixing the Euro, says Krugman:
They really shouldn’t have created the euro in the first place — it was obvious even when Maastricht was signed that Europe didn’t have the right preconditions. (I used to joke that they should have signed the treaty not in Maastricht but in Arnhem; it was a bridge too far).
But now that it exists, it would be a political disaster to let it fail. Ideally we would move quickly to true fiscal union. Since that isn’t likely, the next best is to raise the inflation target, which would make the process of adjustment to imbalances much easier (Spain wouldn’t need deflation, it would just need to lag inflation in the core nations).
It’s not an impossible task, but everything depends on whether the European elite will be willing to drop its illusions and stop making everything into a morality play — and my views on that keep fluctuating.