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Wednesday, January 1, 2014

Prof. Krugman Turning into an Optimist about the Eurozone?

A surprising dose of optimism about the Eurozone comes from an unlikely corner on this first day of 2014 --- from Prof. Paul Krugman! Well, it's not that he has become an optimist. He still describes himself a Europessimist but a Europessimist who now admits "that it’s now possible to see how this could work. The cost — economic, human, and political — will be huge".

Prof. Krugman attributes his reduced pessimism to two things: (a) the 'Draghi-effect', i. e. the commitment of the ECB to act as a sovereign lender of last resort; and (b) the 'amazing determination' of European nations to stay on the Euro at almost any cost.

Still, Prof. Krugman warns that "we have yet to see any of the crisis countries reach a point where falling relative wages are generating a clear export-led recovery, or in which austerity is actually paying off in falling debt burdens".

I wish Prof. Krugman would have gone a bit deeper into the question as to why there isn't more of an export boom in a country like Greece which has recorded a rather substantial internal devaluation. I also wish he would have touched a bit more on the need of North-South direct investments to strengthen economic activitiy in the South.

In short, I wish Prof. Krugman would have gone a bit deeper into questions of the real economies of the South: What are their respective productive capabilities? Where would they have export potential? Where should investments be made to increase productive capabilities and export potential?

I guess Prof. Krugman is a busy man and doesn't have time for that. But someone definitely ought to take the time to address these questions. It's fine and dandy to focus on monetary policies and political determination but if a national economy doesn't have much of a productive capability, it won't employ all of its people and it certainly won't export enough to pay for the desired imports.

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