Paul Krugman: Europe’s Economic Suicide

Paul Krugman: Europe’s Economic Suicide
2012-04-16 15:06:08.719 GMT
 By PAUL KRUGMAN     (New York Times) --
 On Saturday The Times reported on an apparently growing phenomenon in Europe: “suicide by economic crisis,” people taking their own lives in despair over unemployment and business failure. It was a heartbreaking story.But I’m sure I wasn’t the only reader, especially among economists, wondering if the larger story isn’t so much about individuals as about the apparent determination of European leaders to commit economic suicide for the Continent as a whole.     Just a few months ago I was feeling some hope about Europe.You may recall that late last fall Europe appeared to be on the verge of financial meltdown; but the European Central Bank, Europe’s counterpart to the Fed, came to the Continent’s rescue.It offered Europe’s banks open-ended credit lines as long as they put up the bonds of European governments as collateral; this directly supported the banks and indirectly supported the governments, and put an end to the panic.     The question then was whether this brave and effective action would be the start of a broader rethink, whether European leaders would use the breathing space the bank had created to reconsider the policies that brought matters to a head in the first place.     But they didn’t. Instead, they doubled down on their failed policies and ideas. And it’s getting harder and harder to believe that anything will get them to change course.     Consider the state of affairs in Spain, which is now the epicenter of the crisis. Never mind talk of recession; Spain is in full-on depression, with the overall unemployment rate at 23.6 percent, comparable to America at the depths of the Great Depression, and the youth unemployment rate over 50 percent. This can’t go on — and the realization that it can’t go on is what is sending Spanish borrowing costs ever higher.     In a way, it doesn’t really matter how Spain got to this point — but for what it’s worth, the Spanish story bears no resemblance to the morality tales so popular among European officials, especially in Germany. Spain wasn’t fiscally profligate — on the eve of the crisis it had low debt and a budget surplus. Unfortunately, it also had an enormous housing bubble, a bubble made possible in large part by huge loans from German banks to their Spanish counterparts. When the bubble burst, the Spanish economy was left high and dry; Spain’s fiscal problems are a consequence of its depression, not its cause.     Nonetheless, the prescription coming from Berlin and Frankfurt is, you guessed it, even more fiscal austerity.     This is, not to mince words, just insane. Europe has had several years of experience with harsh austerity programs, and the results are exactly what students of history told you wouldhappen: such programs push depressed economies even deeper into depression. And because investors look at the state of a nation’s economy when assessing its ability to repay debt, austerity programs haven’t even worked as a way to reduce borrowing costs.     What is the alternative? Well, in the 1930s — an era that modern Europe is starting to replicate in ever more faithful detail — the essential condition for recovery was exit from the gold standard. The equivalent move now would be exit from the euro, and restoration of national currencies. You may say that this is inconceivable, and it would indeed be a hugely disruptive event both economically and politically. But continuing on the present course, imposing ever-harsher austerity on countries that are already suffering Depression-era unemployment, is what’s truly inconceivable.     So if European leaders really wanted to save the euro they would be looking for an alternative course. And the shape of such an alternative is actually fairly clear. The Continent needs more expansionary monetary policies, in the form of a willingness — an announced willingness — on the part of the European Central Bank to accept somewhat higher inflation; it needs more expansionary fiscal policies, in the form of budgets in Germany that offset austerity in Spain and other troubled nations around the Continent’s periphery, rather than reinforcing it. Even with such policies, the peripheral nations would face years of hard times.But at least there would be some hope of recovery.     What we’re actually seeing, however, is complete inflexibility. In March, European leaders signed a fiscal pact that in effect locks in fiscal austerity as the response to any and all problems. Meanwhile, key officials at the central bank are making a point of emphasizing the bank’s willingness to raise rates at the slightest hint of higher inflation.     So it’s hard to avoid a sense of despair. Rather than admit that they’ve been wrong, European leaders seem determined to drive their economy — and their society — off a cliff. And the whole world will pay the price.

Commodities Corner: Coffee Prices Are Set To Perk

 Commodities Corner: Coffee Prices Are Set To Perk

BARRON'S   -  Leslie Josephs  

  

  Arabica coffee futures are trading near 17-month lows, but prices are poised

to grind higher.

  Brazil, the source of around one-third of the world's coffee beans, had been

expected to reap one of its largest crops on record. That has pushed arabica

prices down 21% so far this year.

  However, trouble is brewing for those forecasts -- and prices should perk up

through the first half of this year.

  First off, dry weather has cast doubts about the Brazilian harvest. The

government estimates a crop of just over 50 million 60-kilogram (132 pounds)

bags for the 2012-13 crop, which begins in May. But some private estimates were

near 60 million bags. Brazil's coffee trees bear fruit in alternating cycles

that produce larger and smaller harvests, referred to as on- and off-cycles.

This is an on-cycle season.

  But due to the parched conditions, output may not soar. Joaquim Ferreira

Leite -- export director at cooperative Cooxupe, whose 12,000 members produce

around 10% of Brazil's crop -- said this year's harvest will most likely be in

line with the last one, when Brazil was in a smaller, off-cycle year that

produced only 43.5 million bags, according to the International Coffee

Organization.

  Also with prices near 17-month lows of $1.7445 a pound, one major U.S.-based

coffee trader said farmers in Brazil may hold their supplies off the market to

pressure prices upward before selling. This tactic recently was successful in

Vietnam, the world's No. 2 producer. Coffee buyers say farmers there held off

selling until prices rallied for their robusta coffee -- arabica's less

expensive, lower-quality cousin. Prices in London for robusta have gained 14%

this year.

  Also, arabica prices hit a 14-year high last May of $3.0625, and farmers

"already got a taste" of those prices and probably will take steps to chase

them this year, the trader said.

  If dryness may clip Brazil's output, the opposite has taken a toll in

Colombia and Central America. Torrential rains in those nations, which produce

about 12% of the world's coffee beans, have led to tight supplies for their

sought-after arabica beans, which should lend additional support to prices this

year.

  Arabica coffee prices will probably average $2.0587 per pound this year,

Societe Generale forecast in a report late last month. On Friday, arabica for

May delivery settled at $1.7920 a pound, down 2.1% on the week.

  "We expect prices to continue trending lower into the Brazilian harvest,

before reversing higher . . . as supplies begin tightening again, assuming

demand remains strong," said Michael Haigh, a Societe Generale analyst.

  Global demand for coffee is growing steadily -- at about 2% annually for

several years. A return to prices above $2 a pound, could open the floodgates

for another move toward the multiyear highs hit last year. More bullish news

should be in store for next season.

  If prices can firm even with an on-cycle Brazilian crop, it is safe to expect

a bigger rally ahead of the 2013-14 season, since Brazil will be in an

off-cycle. Expect prices to start rising again in the second half of the year

in anticipation.

  The market for coffee and the farmers who grow the beans have been subjected

to boom and bust cycles throughout history. But while prices recently have

fallen, the days of low-priced coffee appear to be over.