Bloomberg News

U.S., Europe Nowhere Close to Ending Crisis, Krugman Says

October 03, 2012

Krugman Says U.S., Europe Are ‘Nowhere Close to Ending Crisis’

“Europe must accept there are limits to austerity and that additional austerity won’t do anything but bring societies on the verge of collapse,” said Paul Krugman, an economics professor at Princeton University. Photographer: Ramin Talaie/Bloomberg

The U.S. and the European Union are “nowhere close to ending” the financial crisis and German-led austerity efforts may lead to a 1930s-style economic depression, Nobel laureate Paul Krugman said.

Five years into the crisis, the U.S. needs “another round of stimulus” and Federal Reserve officials “should be doing whatever they can” to aid the recovery, while Europe needs a fiscal union to save its single currency, Krugman said in a speech in Belgrade today.

“Europe must accept there are limits to austerity and that additional austerity won’t do anything but bring societies on the verge of collapse,” said Krugman, an economics professor at Princeton University. “No country will have prosperity until Germany and the ECB have decided that too much pain has been inflicted.”

The European Central Bank and the Fed have unveiled plans to fight the crisis and reduce borrowing costs. ECB President Mario Draghi last month announced an unlimited bond-buying program for distressed euro-area nations, while Fed Chairman Ben S. Bernanke has committed to another round of so-called quantitative easing.

Stabilizing Yields

Europe needs to “contain immediately the financial threat to troubled countries and stabilize yields on their borrowing, which in the end requires the ECB to be ready to be the lender of last resort and buy sovereign bonds,” Krugman said. “And that is now sort of happening,” he said, adding “there are 60 percent odds that they’ll save the euro.”

In the U.S., where the recovery is struggling to gain traction, new fiscal stimulus should be “directed to distressed individuals” rather than companies, Krugman said.

In Europe, the risk of protracted and extreme austerity measures may lead to “political upheavals, radicalization” and “terrible things happening,” he said. “It’s not difficult to see the decades ahead looking like the 1930s.”

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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