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Portfolio > Economy & Markets > Economic Trends

Krugman: Europe’s Greek Debt Deal Will Kill Recovery

By Gil Weinreich

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Markets in Europe have extended their rally on Friday, rising under 1%, following Thursday’s jubilant reaction to Europe’s latest Greek rescue plan.

But Nobel Prize winning economist and New York Times columnist Paul Krugman was not uncorking champagne along with market traders. Comments on his Times blog indicate the lifeline thrown to Greece will end up choking the life out of the entire eurozone. Krugman, known for his Keynesian approach to economics, argues that the Greek rescue plan, by imposing austerity on all euro area member states, will depress demand throughout the eurozone and thereby forestall an economic recovery in Europe.

In several posts written since Thursday’s Brussels summit meeting, Krugman particularly parsed the ninth article of the European leaders’ 14-point plan, which reads:

“All euro area Member States will adhere strictly to the agreed fiscal targets, improve competitiveness and address macro-economic imbalances. Public deficits in all countries except those under a programme will be brought below 3% by 2013 at the latest.”

Krugman’s conclusion: “The Serious People are determined to destroy all the advanced economies in the name of prudence.”

In later posts Krugman elaborated, saying depressed demand will be further inflamed by the ECB’s plans to raise interest rates; he also mocked the idea that all countries must improve competiveness: “So as the Spaniards reduce their labor costs relative to Germany, the Germans will also reduce their labor costs relative to Spain. Progress all around!”

In light of all the pain and short-term damage Krugman foresees, the market rally is somewhat of a mystery to him. Krugman’s reaction, in another blogpost: “Maybe they were pricing in the risk of a breakdown right away.”

In a separate column in Friday’s New York Times, Krugman argues that polices on both sides of the Atlantic “are almost guaranteed to make the broader economic slump worse.”

Meantime, The Times’ crosstown rival, The Wall Street Journal, shares Krugman’s lack of enthusiasm for the European deal, albeit for different reasons. In an editorial on Friday, The Journal argues European leaders’ grab-bag approach (The Journal calls its editorial “Bad Brussels Buffet”) to a Greek rescue is inadequate to solve the problem, “which means that the volatility, the fear and the slow-rolling crisis still have no end in sight.”

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