terça-feira, fevereiro 28, 2012

Krugman: Eurozone problems of its own making

Video:  Krugman critica políticos da Alemanha pela sua visão moralista da economia - Economia - Notícias - RTP

Nobel laureate Paul Krugman  now has three more titles to his name after receiving doctorates honoris causa from three Portuguese universities, the University of Lisbon, the Technical University of Lisbon and the New University of Lisbon on 27-February-2012.
Paul Krugman is aprofessor of economics at the  Woodrow Wilson School of Public and International Affairs of Princeton University and a regular columnist in The New York Times.
Paul Krugman visited Portugal for the first time as a young PhD-candidate deep in the crisis of 1976, a few years before he published his innovative work. 

Krugman received the Nobel prize in 2008 for his work on Economic Geograhy published in 1979 and now known as "new trade theory", which revolutionized analysis with its focus on the gains from economies of scale. Economic geography suggests that a region may benefit comulatively from concentration of economic activity. 
Professor Krugman delighted the capacity crowd in theAula Magna in Lisbon with a  long and interesting discourse on the merits of the  Keynesian economics from costal  "salt water" universities such as Princeton, versus economic orthodoxy from inland "fresh water" universities such as Chicago,  and the risks of ignoring the lessons of the economic history of the 1930's.
Even more relevant for small deficit economies like Portugal, he recalled the  economic history of the  dreadful consequences of e partial return to the gold standard in the 1920's.   The current  crisis  in the Eurozone is mostly of its own making, and Germany's  austerity orthodoxy is the wrong solution to the wrong problem, ostensibly the fiscal deficits.

Krugman's lively speech focused mostly on the fiscal stimulus issue, though  his innovative work on the core-periphery structural concepts of the New Economic Geography would probably have been much more interesting and useful the the Lisbon audience.

The true problem, as he detailed in a recent article is the diverging external accounts among the Eurozone trading partners and the implied the dangerous consequences of the inequitable sharing of the gains from trade.  Although he talked about the dangers of the credit bubble, he did not yet identify the driver that fed the  persistent balance of payments divergence,  the excessive growth of cross-border lending as the Frankfurt banks struggled to recycle the German trade surplus 
This wrong diagnosis pervailing in Europe will mean more painful and essentically ineffective remedies as the crisis worsens.  Instead,  Krugman asks for Germany to stimulate domestic demand.
That, and a pony.

Mariana Abrantes de Sousa
WWSPIA, Princeton University *1975 

See: NY Times blog;
What ails Europe
Pain without gain
Nobel prize doumentary
Krugman on the New Economic Geography, circa 2010
See also Testing the limits of divergence in the Eurozone in PPP Lusofonia