Feb 15, 2010 1:17 pm


Niall Ferguson made the case that A Greek crisis is coming to America:

On reflection, it is appropriate that the fiscal crisis of the west has begun in Greece, the birthplace of western civilization. Soon it will cross the channel to Britain. But the key question is when that crisis will reach the last bastion of western power, on the other side of the Atlantic.

Nonsense, responds Paul Krugman. Greece or Spain are more analogous to Florida - The Federal government bails them out.

Now, if Spain were an American state rather than a European country, things wouldn’t be so bad. For one thing, costs and prices wouldn’t have gotten so far out of line: Florida, which among other things was freely able to attract workers from other states and keep labor costs down, never experienced anything like Spain’s relative inflation. For another, Spain would be receiving a lot of automatic support in the crisis: Florida’s housing boom has gone bust, but Washington keeps sending the Social Security and Medicare checks.

But Spain isn’t an American state, and as a result it’s in deep trouble. Greece, of course, is in even deeper trouble, because the Greeks, unlike the Spaniards, actually were fiscally irresponsible. Greece, however, has a small economy, whose troubles matter mainly because they’re spilling over to much bigger economies, like Spain’s. So the inflexibility of the euro, not deficit spending, lies at the heart of the crisis.

Of course, the rich Europeans do not wish to bail them out. That, writes Krugman, is the real problem.

Yes, but who will bail out the US? China?

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More Comments:

Elliott Aron Green - 2/17/2010

Of course. Nobody can bail out the USA. Because the US is bigger than all the others, economically speaking. China and others were propping up the US financial system by buying those federal bonds and paper. If they reduce or stop buying, then the props are being removed. Then what happens?

On the other hand, China keeps its currency artificially low, which harms the exports of the US and the EU, Japan and other states. Meanwhile, the US administration is spending money that it doesn't have like never before. Then what happens?

Judith Apter Klinghoffer - 2/16/2010

True enough and I do not see the European people willing to ameliorate this state of affairs by "sharing the pain" the way US does. But that does not change the fact that there is no one to bail out the US.

Elliott Aron Green - 2/16/2010

In his NYT op ed, Krugman pointed out that the single currency was a mistake from the beginning, since the eurozone was not ready for it. This is one of the rare occasions when I agree with Krugman. The politicians got ahead of economic reality.

The Euro central bank [ECB] can't control everything. The eurozone member states still do many things separately that impact their economies, taxation, pensions, state budgets, etc.