Dr. Paul Krugman, the Princeton professor who won the Nobel Prize in economics in 2008, warned Europe that Greece is “very close to running out of alternatives” besides leaving the euro zone.
Krugman’s comments – coming yesterday in Lisbon, Portugal – followed Germany’s approval of a second financial bailout package for Greece. In addition, Standard & Poor’s downgraded the Greek sovereign debt rating to “Selective Default.” According to a Bloomberg report, “S&P dropped Greece’s rating from CC, two levels above default, after the government added clauses to its debt designed to mop up investors unwilling to take part in a bond exchange.”
Other highlights from the report included:
Krugman also said that Portugal, which along with Ireland and Greece has received an international bailout, is not at the same stage as Greece and “with luck it never will be.” Still, it’s “hard to believe” the country will return to bond markets in 2013, he said.
It’s a “highly implausible proposition,” Krugman said. “What will have happened in 19 months? The major events that will certainly have happened are a European recession and an outright undisguised Greek default and possibly a Greek exit from the euro. And none of these are going to make it easier for Portugal.”
Krugman said that euro membership has turned out to be “unfortunate,” exposing peripheral economies to “extreme risk with no easy way out.” The Nobel-prize laureate said tougher budget cuts won’t help these countries as “some austerity is necessary but calls for ever more austerity are very disruptive.”
“It may be that in the end, there might come a decision that the euro was a mistake,” Krugman said. “That’s going to be difficult for anyone to acknowledge” and should come in a time of crisis for Europe but it’s a “very real possibility.”
Asked about Chinese aid for Europe, Krugman said that it’s not needed as the resources to solve the debt turmoil are “all here in Europe.” U.S. Treasury Secretary Timothy F. Geithner said in a Feb. 25 speech in Mexico that the region needs to make its crisis-fighting commitments “credible.”