by Paul Krugman
The New York Times
Poland is not yet lost. But its leaders remain determined to give disaster a chance.Poland is one of Europe’s relative success stories. It avoided the severe slump that afflicted much of the European periphery, then had a fairly strong recovery:
And a lot of that relative success clearly had to do with the fact that Poland not only kept its own currency, but allowed the zloty to float. As a result, during the years of big capital flows to the European periphery, Poland saw a currency appreciation rather than differential inflation, and it was able to correct that real exchange rate quickly when crisis struck:
It really does make you want to bang your head against a wall. Think of Spain, Ireland, now Cyprus. How much more evidence do we need that the euro is a trap, which can all too easily leave countries with no good options in the face of crisis? Even if you’ve bought into the legend of Latvia, which you shouldn’t, you should be willing to acknowledge that euro membership is at best a gamble, with a potentially terrible downside.
But no; they still believe that one more cavalry charge will drive those tanks away.
Debt and Devaluation, Mediterranean Edition
When I talk about Cyprus and the possibility of leaving the euro, one immediate question people raise is what about the government’s debt, which is of course in euros. Wouldn’t an exit make that debt unsupportable, and force default?
There are, I’d say, two answers, one more fundamental than the other.
The less fundamental answer is, what makes you think that Cyprus can avoid default even if it stays on the euro? According to the most recent numbers I’ ve seen, the bailout deal will immediately jump Cypriot debt up to 140 percent of GDP, about the same as Greece in 2010 — and as I’ ve argued, we’re looking at the likelihood of an even more severe slump plus deflation than Greece has experienced. How is this supposed to work?
The more fundamental answer is, holding the nominal exchange rate fixed and relying on “internal devaluation” rather than devaluation devaluation does not, in fact, help make debt more manageable. Either way, the real value of the debt gets blown up over time — more quickly via devaluation, to be sure, but that’s the flip side of making the necessary cost adjustment faster too.
So the debt is not a good reason to stay on the euro. I guess that if I were arguing for keeping the euro, I would instead be making mainly a political case — basically, that you’ll get better treatment from Brussels and Berlin if you remain a good soldier. But boy, will the cost be high.
There are, I’d say, two answers, one more fundamental than the other.
The less fundamental answer is, what makes you think that Cyprus can avoid default even if it stays on the euro? According to the most recent numbers I’ ve seen, the bailout deal will immediately jump Cypriot debt up to 140 percent of GDP, about the same as Greece in 2010 — and as I’ ve argued, we’re looking at the likelihood of an even more severe slump plus deflation than Greece has experienced. How is this supposed to work?
The more fundamental answer is, holding the nominal exchange rate fixed and relying on “internal devaluation” rather than devaluation devaluation does not, in fact, help make debt more manageable. Either way, the real value of the debt gets blown up over time — more quickly via devaluation, to be sure, but that’s the flip side of making the necessary cost adjustment faster too.
So the debt is not a good reason to stay on the euro. I guess that if I were arguing for keeping the euro, I would instead be making mainly a political case — basically, that you’ll get better treatment from Brussels and Berlin if you remain a good soldier. But boy, will the cost be high.
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