Paul Krugman just wrote that the creation of the euro effectively reinvented the defects of the gold standard, which played a major role in causing the Great Depression.
I’m sorry, but I totally disagree with that statement. The monetary union isn’t perfect. They didn’t get it completely right the first time, but they got it 95 percent right. Policymakers are making very human mistakes, but that doesn’t mean the whole thing was doomed in the first place.
Is Europe going to get itself out of this problem?
Sure. I expect the arrangements with Greece are not going to work any better than the previous one. I think Greece will default. But I don’t think Greece will leave the euro. Meanwhile policymakers are very slowly moving in the right direction.
What will be the knock-on effect of Greece?
I think the Greek default will be followed by a Portuguese default, which may be followed by an Italian default.
How much austerity is out there?
There is quite a bit. That’s what I think has been one of the strategic mistakes. It reflects a German misreading of its own history and the German fear that they will have to pay for the so-called lazy Greeks. All of these are tragic mistakes that have created the recession we are in—and which prolong and deepen the crisis.