Interview with Nobel Economist Paul Krugman: 'Merkel and Steinbrück Are Wasting Crucial Time'
This year's winner of the Nobel Prize for Economics, Paul Krugman, has joined the chorus of those criticizing German government inaction in the face of the financial crisis. He spoke to SPIEGEL about the price of doing nothing and why he thinks Berlin has misjudged the severity of the slump.
SPIEGEL: You have accused the German government of "boneheadedness" in its approach to the financial crisis. What are Chancellor Merkel and her Finance Minister Peer Steinbrück doing wrong?
Paul Krugman, winner of the this year's Nobel Prize in Economics.
SPIEGEL: What could be the reasons for their reluctance?
Krugman: I suspect there is a tendency to view any sort of European expansion as a way to get Germany to subsidize the rest of the EU. And maybe it's just lack of intellectual flexibility.
SPIEGEL: Germany's government is worried tax cuts and stimulus packages might just evaporate. Is there any truth to this way of thinking?
Krugman: There's reason to fear that tax cuts would be ineffective. But that's a case for a better designed program, not for doing nothing.
Krugman: Understandable -- but it's petty to worry about this when the European economy, very much including Germany, is in grave danger.
SPIEGEL: Unlike Americans, Germans tend to spend less and save more. Is there a danger any kind of tax benefits might just end up in saving accounts?
Krugman: Yes, there is. That's why the focus of a program should be on government spending as much as possible. But the perfect is the enemy of the good -- we are in a severe plunge, and must do as much as possible quickly.
SPIEGEL: Are there no alternatives?
Krugman: In normal times monetary policy, combined with automatic stabilizers, is sufficient. I'm opposed to discretionary fiscal policy in normal times.
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Krugman: Monetary policy has lost traction! When interest rates are either at the zero lower bound or quickly approaching that point, fiscal stimulus becomes essential.
SPIEGEL: What would you advise the German government to do?
Krugman: I won't try to prescribe details -- I am still working on the US situation. But a significant stimulus, soon, is crucial whatever its composition.
SPIEGEL: How much do German policies matter in the fight against the global financial crisis?
Krugman: Europe has a major coordination problem: The trade-off between deficits and output is much less favorable for any country acting unilaterally than for the EU as a whole. So cooperation is essential. But if Germany, the largest economy, refuses to go along, there will be no cooperation. Events have given Germany a strategic policy importance disproportionate to its size.
SPIEGEL: What's the price of inaction?
Krugman: A very, very severe slump, with worse unemployment than at any time since the 1930s -- and quite possibly a Japanese-type lost decade to follow.
SPIEGEL: What is your outlook for the US economy?
Krugman: If nothing happens, we'd have 11 percent or more unemployment by the end of 2009. Even with stimulus, 10 percent unemployment is possible. And it could well go on for years -- even the 2001 recession generated a 30-month employment slump. We need a huge stimulus in the United States -- intervention in the mortgage market to lower rates, plus 4 percent or more of gross domestic product in recovery measures.
Interview conducted by Frank Hornig
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