“Spain needs a change in monetary policy; if it fails, the euro will fail”

Paul Krugman sees a mere glimmer of hope in last week's EU deal on banking union and bond purchases

Paul Krugman, outside Madrid’s Rafael del Pino Foundation.
Paul Krugman, outside Madrid’s Rafael del Pino Foundation. SAMUEL SÁNCHEZ

In the last three years, Paul Krugman hasn’t changed much physically but his message has, and by a lot. He is no longer proposing 30-percent wage cuts or onerous plans to reduce public spending; all he wants is for the European Central Bank (ECB) to step in. His discipline and punctuality is also unchanged as he attends the presentation in Madrid of a Spanish translation his new book End this Depression Now!

Question. Let’s say I am Spaniard with savings. What should I do with my money?

Answer. Oh my God, I don’t want to be responsible for anyone’s savings. But there is a real possibility that the euro will break up. What was once unthinkable is possible today. Obviously I cannot give any clear advice but it is a very complicated situation, and there could be some people who lose part of the value of their savings. I don’t think we are talking about a catastrophic situation, but it doesn’t look very good either.

Q. Do you still see the possibility of an Argentinean-style corralito [freezing of accounts] occurring here in Spain?

A. This would be part of the scenario if the euro failed. It wasn’t my intention to cause a lot of confusion when I said [the word corralito in a blog post]. This is something that would happen until another currency is introduced, but it isn’t something that is going to happen from one day to the next.

Q. Were you bothered by the criticisms coming from the Spanish government?

Spain is not 'come and rescue us' but rather it needs a change in monetary policy"

A. It is normal for any government to not want an economist to cause a panic, and I don’t want to cause one either. But at the same time I don’t want to be dishonest. Of course, governments will always say that this won’t occur. And I am sure that this government has no intention of doing such of a thing. Everyone wants to continue to stick with the euro and try to save it. But again I hope someone is coming up with a contingency plan because the situation is very difficult.

Q. You have said that you see little difference between the policies of Zapatero and those of Rajoy?

A. I think they would have done things differently if there was a surplus but this isn’t case. It appeared that Rajoy was going to come on board and everything was going to get solved, but the fact is that nothing has changed in terms of policies from the previous government because they both have little room for maneuver.

Q. Do you believe that the bank bailout Spain has asked for will be enough or will it need more assistance.

A. Spain needs a bailout of its banking sector and it needs it to be done well. What happened three weeks ago was such a disaster that it made things worse. The agreement coming out of the recent summit looks more like a proper rescue for banks facing problems: risks are shared and not just assumed by the Spanish government alone. But that doesn’t solve the problem. I also don’t think that a sovereign bailout is the answer — you just have to look at what is happening in Greece and Ireland, where there is not even the hint of a recovery. I don’t even think there is enough money for a Greek-style rescue for Spain. What Spain needs is a change in European macro-economic policy, and for the ECB to purchase bonds to reduce its yields. Spain is not “come and rescue us” but rather it needs a change in monetary policy.

Q. And economic policy, too.

A. Basically it is monetary policy. The ECB is the only one that has the necessary tools to act. Spain has the disadvantage that it is too big to be rescued in the way Portugal was. But Spain does have the advantage that if it isn’t successful, neither will the euro be successful. So Spain’s destiny is the euro’s destiny.

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