Nobel Prize-winning economist Paul Krugman has written extensively about the crisis in the eurozone -- what led to it and what should be done about it. Following last week's Group of Eight meeting, in which European leaders expressed hope that debt-ridden Greece remain in the eurozone, RFE/RL correspondent Heather Maher spoke to the prominent American economist to get his thoughts.
RFE/RL: The economic story of the moment is Greece. While some European politicians and economists are issuing dire warnings about what a Greek exit from the euro would entail -- saying the ultimate bill could add up to $1 trillion and cause a chain reaction that could drag down many other countries -- others are downplaying the risks. How do you see it playing out?
Paul Krugman: I think it's going to be ugly if it happens, which it probably will at this point. I think that the notion that there's a huge bill is probably wrong. It's going to hit the Greek economy pretty hard, there will be some losses on loans to Greece, but those losses are probably going to happen regardless. And if it's contained, if the Europeans do what's necessary so that it doesn't cause a full breakup of the eurozone, then it's not such a bad thing. In the end this is a fairly small economy on an unsustainable course. So some kind of resolution -- even if it's one that's quite ugly in the first year -- is better than not.
RFE/RL: What does what's happening in Greece say about the viability of the euro going forward? Should it be saved? And if so, how?
Krugman: I'm actually advocating that the European Central Bank both act as a very open-ended lender to European banks and governments, and raise its inflation target as a way of saving the euro. I think the euro does need to be saved if at all possible. But the point is the current policies are not -- the current policies are in fact dooming it. It would be a very bad thing if the euro fails, even though I think it was a mistake; but we made that mistake -- or they made that mistake -- and now you want to save it because a failure of the euro would be very bad for the European project, which is ultimately about peace, prosperity, and democracy, which we should all be in favor of maintaining as best we can.
RFE/RL: How is the crisis going to affect countries outside the eurozone that trade extensively with the bloc? If the euro did break up, wouldn't there be huge financial disruptions for international trade?
Krugman: Yes, all of this is going to be bad for the European economy. It's going to hurt everybody who exports to Europe, which is basically everybody. The size of the effect will depend a lot on how big the trade is. So for the United States, which only sells about 2 percent to Europe, it's not such a big deal. For Eastern Europe, it's going to be a much bigger deal. When one of the world's two greatest economies -- the United States and the eurozone are still the two big players in this field -- when one of them is experiencing big difficulties, of course it's going to affect everyone in the world.
RFE/RL: You've written that European leaders who stick to austerity programs are committing "economic suicide." It seems an increasing number of European voters agree. So why don't Europe's economic leaders see it that way? Or are there signs Germany may be coming around?
Krugman: It's very difficult for any individual European leader, aside from the Germans, to deviate from the orthodoxy because if you do you don't have enough leverage, the markets will punish you, it's just very hard to step outside that box. It's a very agonizing thing, being the prime minister of a small European country. You have only the nuclear option of leaving the euro or just pleading for some change in Europe-wide policy. I try to avoid national stereotypes, but there is this line from ["Financial Times" economic commentator] Martin Wolf that [says], 'In Germany, economics is a branch of moral philosophy.' They have really wanted to see this in terms of sinning debtors, and sin must be followed by a painful redemption. And the fact that that's not how the economics is working has been very hard for them to accept.
RFE/RL: If the euro breaks up, will the dollar rise? Or is it more complicated than that?
Krugman: It's more complicated. It's a funny thing because, the dollar rise against what? If the euro breaks up or if it's a diminished euro then what's left is essentially a [German] mark. That might be a very strong currency, not a weak one. Even now the euro has remained -- some people think it's surprising how strong it's been, but that's because Germany looks like a pretty safe investment, and while peripheral Europe does not, the interest rates on peripheral European debt are very, very high. So I'm not sure I know what the answer is on the effect on the dollar. But it's certainly not as simple as, "Oh well, that means that the dollar will soar because the euro is gone."
RFE/RL: Where should nervous investors outside the eurozone put their money? Would you advise them to get rid of their euros now?
Krugman: Oh boy. I try not to give investment advice. I think basically any country that has its own currency, has a stable, advanced country, is looking pretty safe. That's the United States, the U.K., it's Sweden, and, for practical purposes, it turns out to be Germany, because Germany does seem to have its own currency, which happens at the moment to be the euro, which is acting a lot more like a German currency than like a European currency. So there are plenty of safe havens out there.
RFE/RL: Do you expect the euro crisis to drag out for weeks, months, years?
Krugman: Well months, not weeks. Even Greece probably won't be settled one way or the other that quickly. But if Greece [leaves the eurozone], as I expect it will -- which is probably something that will take place in months -- then the moment of truth will come to the rest of the eurozone quite quickly. So I would be surprised if we don't have a pretty clear resolution one way or the other within a year.
RFE/RL: The economic story of the moment is Greece. While some European politicians and economists are issuing dire warnings about what a Greek exit from the euro would entail -- saying the ultimate bill could add up to $1 trillion and cause a chain reaction that could drag down many other countries -- others are downplaying the risks. How do you see it playing out?
Paul Krugman: I think it's going to be ugly if it happens, which it probably will at this point. I think that the notion that there's a huge bill is probably wrong. It's going to hit the Greek economy pretty hard, there will be some losses on loans to Greece, but those losses are probably going to happen regardless. And if it's contained, if the Europeans do what's necessary so that it doesn't cause a full breakup of the eurozone, then it's not such a bad thing. In the end this is a fairly small economy on an unsustainable course. So some kind of resolution -- even if it's one that's quite ugly in the first year -- is better than not.
RFE/RL: What does what's happening in Greece say about the viability of the euro going forward? Should it be saved? And if so, how?
Krugman: I'm actually advocating that the European Central Bank both act as a very open-ended lender to European banks and governments, and raise its inflation target as a way of saving the euro. I think the euro does need to be saved if at all possible. But the point is the current policies are not -- the current policies are in fact dooming it. It would be a very bad thing if the euro fails, even though I think it was a mistake; but we made that mistake -- or they made that mistake -- and now you want to save it because a failure of the euro would be very bad for the European project, which is ultimately about peace, prosperity, and democracy, which we should all be in favor of maintaining as best we can.
RFE/RL: How is the crisis going to affect countries outside the eurozone that trade extensively with the bloc? If the euro did break up, wouldn't there be huge financial disruptions for international trade?
It's very difficult for any individual European leader, aside from the Germans, to deviate from the orthodoxy because if you do you don't have enough leverage, the markets will punish you.
Krugman: Yes, all of this is going to be bad for the European economy. It's going to hurt everybody who exports to Europe, which is basically everybody. The size of the effect will depend a lot on how big the trade is. So for the United States, which only sells about 2 percent to Europe, it's not such a big deal. For Eastern Europe, it's going to be a much bigger deal. When one of the world's two greatest economies -- the United States and the eurozone are still the two big players in this field -- when one of them is experiencing big difficulties, of course it's going to affect everyone in the world.
RFE/RL: You've written that European leaders who stick to austerity programs are committing "economic suicide." It seems an increasing number of European voters agree. So why don't Europe's economic leaders see it that way? Or are there signs Germany may be coming around?
Krugman: It's very difficult for any individual European leader, aside from the Germans, to deviate from the orthodoxy because if you do you don't have enough leverage, the markets will punish you, it's just very hard to step outside that box. It's a very agonizing thing, being the prime minister of a small European country. You have only the nuclear option of leaving the euro or just pleading for some change in Europe-wide policy. I try to avoid national stereotypes, but there is this line from ["Financial Times" economic commentator] Martin Wolf that [says], 'In Germany, economics is a branch of moral philosophy.' They have really wanted to see this in terms of sinning debtors, and sin must be followed by a painful redemption. And the fact that that's not how the economics is working has been very hard for them to accept.
RFE/RL: If the euro breaks up, will the dollar rise? Or is it more complicated than that?
Krugman: It's more complicated. It's a funny thing because, the dollar rise against what? If the euro breaks up or if it's a diminished euro then what's left is essentially a [German] mark. That might be a very strong currency, not a weak one. Even now the euro has remained -- some people think it's surprising how strong it's been, but that's because Germany looks like a pretty safe investment, and while peripheral Europe does not, the interest rates on peripheral European debt are very, very high. So I'm not sure I know what the answer is on the effect on the dollar. But it's certainly not as simple as, "Oh well, that means that the dollar will soar because the euro is gone."
RFE/RL: Where should nervous investors outside the eurozone put their money? Would you advise them to get rid of their euros now?
I think basically any country that has its own currency, has a stable, advanced country, is looking pretty safe.
Krugman: Oh boy. I try not to give investment advice. I think basically any country that has its own currency, has a stable, advanced country, is looking pretty safe. That's the United States, the U.K., it's Sweden, and, for practical purposes, it turns out to be Germany, because Germany does seem to have its own currency, which happens at the moment to be the euro, which is acting a lot more like a German currency than like a European currency. So there are plenty of safe havens out there.
RFE/RL: Do you expect the euro crisis to drag out for weeks, months, years?
Krugman: Well months, not weeks. Even Greece probably won't be settled one way or the other that quickly. But if Greece [leaves the eurozone], as I expect it will -- which is probably something that will take place in months -- then the moment of truth will come to the rest of the eurozone quite quickly. So I would be surprised if we don't have a pretty clear resolution one way or the other within a year.
