Krugman: This is the way the euro ends

Krugman sees that the end is near:

[W]ith Italian 10-years now well above 7 percent, we’re now in territory where all the vicious circles get into gear — and European leaders seem like deer caught in the headlights. And as Martin Wolf says today, the unthinkable — a euro breakup — has become all too thinkable[.]

Krugman quotes some of what Martin Wolf said. Here's a bit more (my emphasis throughout):

Mr Roubini discusses four options for addressing these stock and flow challenges simultaneously: first, restoration of growth and competitiveness through aggressive monetary easing, a weaker euro and stimulatory policies in the core, while the periphery undertakes austerity and reform; second, a deflationary adjustment in the periphery alone, together with structural reforms, to force down nominal wages; third, permanent financing by the core of an uncompetitive periphery; and, fourth, widespread debt restructuring and partial break-up of the eurozone. ... The second would fail to achieve flow adjustment in time and so is likely to morph into the fourth. ... The fourth would simply be the end.

Only the second and fourth options are on the table. Both lead to the end, according to Roubini.

In the meantime, time is running out. The Financial Times headline as I write:

Market confidence in Italy collapses
Yields on 10-year goverment bonds close to 7.5%

And here's the New York Times on what the ECB will do:

THE escalating debt crisis in Europe has claimed the political career of one prime minister, George A. Papandreou of Greece, and threatened that of another, Silvio Berlusconi of Italy. Despite popular resistance, governments are racing to stay ahead of the bond markets by slashing their budgets. The drama of meetings, proposals, counterproposals and popular unrest seems destined to end in tragedy.

The Times is saying what Roubini is saying — austerity-driven disaster is next on the agenda.

Krugman again:

I believe that the ECB rate hike earlier this year will go down in history as a classic example of policy idiocy. We would probably still be in this mess even if the ECB hadn’t raised rates, but the sheer stupidity of obsessing over inflation when the euro was obviously at risk boggles the mind.

You can read this as a morality play, in which hyper-moral lemmings (European elites and the ECB) lead each other over the cliff.

But you know the rich will not pay the price. They'll summer in Cannes till they die.

Which leads to the other reading — as heroic drama in which the elites save each other (by making sure none of the hyper-rich take a loss) at the expense of governments and the "small people."

You know, like inverse Robin Hoods, or totally modern Scarlet Pimpernels — the rich riding to the aid of the rich just ahead of the (unwashed) voting public.

Either way, Krugman puts a fork in it. The euro may survive, in a core-countries kind of way. The Eurozone however, as currently conceived, will not. Euro-elites would have to grow a pair (one set of brains and a cupful of civic-mindedness) for that sad end to be avoided.

GP