Paul Krugman: A Continent Adrift
This article is from the website www.nakedcaptilism.com . I was particular interested in the differences in the Fiscal and Monetary policies in America compared to that of Europe. The article also provided me with some insight on the effects of government intervention in the economy.
This article examines the effects of the financial crisis in Europe and how government officials are handling it. Krugman states in his opening paragraph that
“I’m concerned about Europe. Actually, I’m concerned about the whole world… But the situation in Europe worries me even more than the situation in America. “
The major reason why the situation in Europe is worse than in America is because “Europe has fallen short in terms of both fiscal and monetary policy”
That is the government is not intervening in the Economy effectively. An efficient fiscal plan has not been implemented to stimulate the economy in Europe, nothing of any magnitude as that of president Obama. Krugman elaborates that
“The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates…, and it has shied away from any strong measures to unfreeze credit markets. Europe’s economic and monetary integration has run too far ahead of its political institutions……This is a major reason for the lack of fiscal action: there’s no government in a position to take responsibility for the European economy as a whole. What Europe has, instead, are national governments, each of which is reluctant to … finance a stimulus that will convey many if not most of its benefits to voters in other countries. The difference in monetary policy is equally striking. The European Central Bank has been far less proactive than the Federal Reserve; it has been slow to cut interest rates…, and it has shied away from any strong measures to unfreeze credit markets. After all, while there isn’t a European government, there is a European Central Bank. But the E.C.B. isn’t like the Fed, which can afford to be adventurous because it’s backed by a unitary national government — a government that has already moved to share the risks of the Fed’s boldness.”
Currently it seems like the creation of the Euro may be a problem because it is hard for all the governments of the 16 European nations to come to a general consensus on how the handle their fiscal and monetary policies. As Krugman states “Europe is turning out to be structurally weak in a time of crisis.”
This situation may prove that it is beneficial for the government to intervene in the economy especially in time of crisis. Since, fiscal and monetary policies are essential for the stabilization of the economy. I know that a lot of people may not agree but it is good when the government intervene in the economy especially in the banking industry. We can be contented that if the banks fail up to $200 000 is insured by the Federal Deposit Insurance (FDIC) and most of us do not even have that much money in the bank anyway. In light of the current financial crisis the American government has also implemented several policies to lessen the financial burden of the American society. New home owners can borrow a $7000 interest free loan from the government. President Obama has implemented a stimulus package that will give people a huge tax break. I also do not think that anyone was unhappy with President Bush when they received their stimulus package checks last year.
I am not pro Socialism but I do not believe that the economy will fix itself. I strongly believe that tgovernment intervention is necessary especially in times of crisis. If you are still skeptical just examine how the financial crisis is affecting Europe. They are debt-ridden, Hungary has $100 billion of external debt, Ukraine is desperate, barely able to pay its gas bill to Russia and Latvia has witnessed riots. The European nation is experiencing a severe financial collapse.
