Forget the first half of Paul Krugman’s article in the New York Times today and concentrate on the second. It begins here:
Europe’s economic and monetary integration has run too far ahead of its political institutions. The economies of Europe’s many nations are almost as tightly linked as the economies of America’s many states — and most of Europe shares a common currency. But unlike America, Europe doesn’t have the kind of continentwide institutions needed to deal with a continentwide crisis.
This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to run up large debts to finance a stimulus that will convey many if not most of its benefits to voters in other countries.
You might expect monetary policy to be more forceful. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness, and will surely cover the Fed’s losses if its efforts to unfreeze financial markets go bad. The E.C.B., which must answer to 16 often-quarreling governments, can’t count on the same level of support.
Europe, in other words, is turning out to be structurally weak in a time of crisis.
That’s spot on. Krugman then goes on to point out how countries trapped in the euro do not really have the option of devaluing their way out of this mess. For all practical purposes, that’s right, although Krugman might have added that one of the reasons that some European economies are in so much trouble now is the way that the euro helped fuel an asset-price bubble in countries that simply were not ready for a (relatively) hard currency. One currency simply did not fit all. And it was never going to.
Krugman begins his conclusion as follows:
Does all this mean that Europe was wrong to let itself become so tightly integrated? Does it mean, in particular, that the creation of the euro was a mistake? Maybe.
There’s no “maybe” about it, but note how Krugman finishes:
But Europe can still prove the skeptics wrong, if its politicians start showing more leadership. Will they?
That rather depends what is meant by “leadership.” What we can be sure of is that many in the EU’s hierarchy will use this crisis to argue for an even deeper level of integration.