Nobel laureate warns from curtailing social programs and budget saving because of bad news from Europe

Baku, Fineko/ Nobel Laureate in Economics Paul Krugman has warned against curtailing of state social programs and introduction of fiscal austerity in connection with the European crisis.

In his column in The New York Times he called to draw conclusions from a real understanding of European problems, not from politicized interpretations.

"Understanding of the nature of European problems will bring a little to Europeans themselves. The crisis affected countries only have a choice from several evils: either they undertake the burden of deflation, or agree on a radical step and withdraw from euro that is not politically acceptable but is possible in case all other alternatives fail (maybe Greece is approaching to this point now).

Germany could help the situation by abolishing its policy of economy and agreeing on the increase in inflation, but it will hardly do that. For everyone else, be that as it may, the correct understanding of the situation in Europe is of great importance, because the false tales about Europe are used to promote violent or destructive political tactics. The next time you will be brought a European example, speaking of the need for the abolition or reduction of social spending under conditions of deep economic backwardness, we must remember this: they do not understand what they say," Krugman stated.

He criticized the prevailing interpretation of the European problems. In the version of the U.S. Republican Party, these interpretations say that Europe has got into difficult situation, because it did too much to help the poor and miserable, and we are now seeing the agony of the welfare state. It is confirmed neither by statistics of social spending of the affected countries nor by the rapid economic growth in the main European "welfare state" - Sweden.

"So, the overbuilt welfare state is not a source of problems," Krugman considers.

The German interpretation accusing irresponsible fiscal policy in European problems is confirmed in Greece, but nowhere else. According to Krugman himself, the cause of disasters in Europe is in fact mostly in currency.

"By introducing a single currency without the necessary institutions that would guarantee its work, in fact, Europe has revived the defects of the gold standard, which played an important role in the emergence and protracted nature of the Great Depression. If to be concrete, creation of the euro inspired a false sense of security to private investors and thereby triggered huge unstable capital flows to countries throughout the European periphery. And as a result of this influx, costs and prices there increased, production became uncompetitive, and the countries which had fixed-ration trade balance in 1999, began to fix a large trade deficit. And the music stopped," Krugman said.

He estimates that if the peripheral countries still had had their own currencies, they could have resorted to devaluation to restore competitiveness. But they do not have their own currencies, so it means they will have a long period of mass unemployment and slow deflation. The debt crisis of troubled countries is largely a byproduct of this sad prospect, because depression in the economy leads to budget deficits and deflation increases the burden of debt.

Based on Krugman’s estimates, a reaction to the European crisis in such countries as Lithuania and Latvia which sharply reduced state social spending was absolutely wrong. Together with the new social taxes this has led to a massive outflow of the already meager population and the actual curtailment of national economies. Power in Ukraine and Russia also did wrong by trying to restrain the national currencies from devaluation and not forcing domestic consumption due to the "distribution of money." Based on the progress of the presidential campaign in Russia and analysis of programs of the candidates running for the president, after the elections Russia will inevitably return to pumping the economy with money, since 4 out of 5 candidates promise their voters a "package" worth from 1 to 10 trillion rubles. Even the program of the only candidate from large business implies a certain (non-cash) increase in social spending due to changes in the tax burden.

During the crisis Azerbaijan did not make mistakes of peripheral EU countries or CIS partners, but the past year showed that the country’s economy remains underfunded and underinvested (from here, the minimal growth). In particular, government spending does not reach the end mass consumer, and the economy engine operates at low speed - will take a "mountain", but one can hardly expect progress to a higher level of socio-economic development. Today, Azerbaijan is in need of a combined scheme of distributing money to the mass consumer and reduction of the level of social taxes, which can be compensated at the expense of higher taxes for luxury items, which are mostly imported.



28.02.2012 10:01

Tags: Krugman

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