Krugman’s blog, 6/17/16

There was one post yesterday, “When Virtue Fails:”

There are two narratives about the euro crisis. One – favored by English-speaking economists, including yours truly – sees it all through the lens of optimum currency area theory. Basically, shocks happen, and when you establish a common currency without a shared government, you give countries no good way, fiscal or monetary, to respond to these shocks.

The other narrative, however, favored by Berlin and Brussels, sees the whole thing as the wages of sin. Southern European countries behaved irresponsibly, and now they’re paying the price. What everyone needs to do, they say, is institute a reign of virtue, of fiscal responsibility with structural reform, and all will be well.

So it’s important to note that the euro area’s locus of trouble is moving from the south to an arc of northern discomfort — to countries that don’t at all fit the stereotype of lazy southerners.

Notably, Finland is the new sick man of Europe. And the Netherlands — which in many ways is more German than the Germans — is doing slightly better than Italy but significantly worse than France and Portugal.

Indeed, France – the subject of a thousand news reports about how a generous welfare state is killing its economy — is doing relatively OK.

The specific shocks vary. Finland has been hit by the fall of Nokia and the adverse effect of digital media on newsprint exports. The Dutch are suffering from a burst housing bubble, severe deleveraging, and an extra burden of austerity mania. But the overall point is that when things go wrong there’s no good answer.

So maybe the woes of the euro reflect a bad system, not moral failure on the part of troubled nations? Das ist unmöglich!

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