He basically sees two possible outcomes, both of which are “impossible.”
One possibility is that the ECB aggressively buys peripheral debt and caps the borrowing costs of Spain and Italy, while simultaneously making it clear that they’re going to promote “expansionary monetary policies” that boost inflation in Germany and help restore competitiveness between Germany and the periphery.
“That can work… it’s still going to be extremely painful,” he says.
But would Berlin actually sign off on an ECB-based debt monetization, pro-inflation scheme? That’s very un-German.
That gets to Krugman’s other possibility … Basically, eventually the ECB…
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