Bronwen Maddox introduces the July issue.by Bronwen Maddox / June 20, 2012 / Leave a comment
Published in July 2012 issue of Prospect Magazine
Krugman makes his case most easily for the US, arguing that abrupt cuts in public spending, particularly by state governments, worsened a fall in demand. Indeed, C. Randall Henning, on California’s lessons for the eurozone, reminds the EU that Washington offers the states no bailout if they go broke. Henning is right too that Europe needs a pact to support its banks. It beggars belief that Brussels waited for the Spanish banking crisis to consider this, four years after Iceland spectacularly showed that taxpayers of a tiny country cannot insure the customers of huge banks which happen to be headquartered there.
But America is often a poor laboratory for the world. Krugman’s prescriptions transfer awkwardly. He does acknowledge the eurozone’s special predicament. But he says too little about China and the case that the west’s real problem is the failure to make things the world wants. While he agrees that, in the US, “something will have to give” in the face of gigantic obligations on pensions and healthcare, a promise to make cuts later is a tough test of credibility. He is too blithe about the reaction of bond markets to such a promise from countries other than the US. True, trading floors are littered with the bodies of those who have prophesied that Japan’s huge debts would bring crisis, but few Europeans would want to test the markets that far. Osborne has more cause for caution than Barack Obama.