Paul Krugman does a very good job laying out the issues behind the euro zone crisis in his NYT Magazine piece. There are two additional points that would have been worth noting.
First, there are powerful forces who are working hard to prevent the partial or full Argentinification (partial default or a departure from the euro) of any euro zone country. After all, it does mean that banks and other creditors don’t get back all of their money. They will lie, cheat, and steal to try to prevent such a route from even being considered. We know this because of the efforts of the international financial community to punish Argentina when it went the route of Argentinification back in 2002.
The IMF did everything it could to strangle Argentina (it was known internally as the “A” word) including the publication of consistently over-pessimistic growth projections in order to undermine confidence in its economy. Given that many of the same people who were shooting at Argentina in 2002 are still around in positions of responsibility today, it is reasonable to believe that any country that tried to follow the same path would face similar efforts at economic sabotage.
The other important point is that the “revived Europeanism” route that Krugman outlines would essentially be costless right now to the core countries who would ostensibly be financing it. This is the route that would have the European Union and/or European Central Bank provide the funding necessary to get Ireland, Greece, Spain, and other peripheral countries through the crisis.
This route would be largely costless because Europe, like the United States, has huge amounts of excess capacity and idle resources. The ECB could essentially finance the transfers by buying bonds (i.e. printing money) just as the Fed can (and to some extent is) finance the U.S. deficit by buying bonds. While printing money at other times would raise the risk of inflation, this is not the case in the middle of a steep downturn like the current one. Of course a modest increase in the rate of inflation (e.g. 3-4 percent) would be desirable in any case since it would lower real interest rates and reduce real debt burdens.
In the longer term, when the economy does recover, the ECB or the Fed could raise reserve requirements to ensure that the reserves placed into the system in a period of economic crisis do not lead to excessive inflation. This scenario would allow Germany, France, and other core countries to bail out Europe’s periphery without any burden on their own taxpayers.
Dean Baker is an economist and Co-director of the Center for Economic and Policy Research, in Washington, D.C. This article was first published in CEPR’S Beat the Press blog on 13 January 2011 under a Creative Commons license.