Friday, 2 December 2011

Krugman doesn’t fully understand Europe.

Krugman is not up to his usual high standards in this article. He claims the EZ’s problem is insufficient demand.

Well demand is OK in the core countries. Inflation is near the 2% target, so while demand could be bumped up a little perhaps, it cannot be increased dramatically.

The big problem is the uncompetitive periphery. If demand for the EZ is increased enough to bring full employment in the periphery, that means excess inflation in the core. And Germans wouldn’t like that.

I.e. the central problem, missed by Krugman, is the disparity in competitiveness.


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