Greece stands out as the main villain of the European crisis. Multiple Greek governments had grossly falsified their statistics and maintained an average budget deficit of 7 percent of GDP for the last two decades, refusing to fulfill their EU obligations. The George Papandreou government adopted a stabilization program in May 2010, with more IMF funding than any IMF program in history but one year later it had expanded the already excessive public administration by a net of 5,000 civil servants. Papandreou raised already high taxes rather than cutting public expenditures.
Yet incredibly, Krugman calls Greece a victim, laying all blame for its predicament on the EU, the European Monetary Union, and Germany. When he's not exclaiming "this isn't a Greek problem... it's a European problem," he's pointing the finger at "the arrogance of European officials, mostly from richer countries, who convinced themselves that they could make a single currency work without a single government."
More bizarrely, while he considers Greece innocent, Krugman has attacked the far smaller and poorer Baltic countries in perhaps a dozen blog posts. Krugman is not, presumably, some kind of bizarre anti-Baltic bigot. His problem is that they have pursued austerity and succeeded; they prove that Krugman's analysis of the European crisis is wrong. As it happens, Estonia actually adopted the euro in January 2011, and the Baltic economies appear to have entered a high-growth trajectory.
Krugman's sour grapes are on full display. He dismissed the success of Estonia, "the poster child for austerity defenders" as insignificant in a June 6 post that provoked the wrath of Estonia's President Toomas Hendrik Ilves on Twitter. Undeterred, on July 1, he wrote, "the best the defenders of orthodoxy can do is to point to a couple of small Baltic nations that have seen partial recoveries from Depression-level slumps, but are still far poorer than they were before the crisis." On one rare occasion, Krugman partially admitted a positive effect from austerity: "yes, it's actually worth noting that essentially nobody has managed to regain the confidence of the markets [through austerity], except for, you know, Latvia, which had almost no debt." Well, if you pursue austerity, you do escape debt.
The most generous explanation for Krugman's Baltic blind spot is that he thinks mostly about big states, and perhaps only about the United States. Small, open economies work quite differently. Tiny countries tend to adopt a foreign currency or peg their exchange rates, as the Baltic countries and Bulgaria have done. They cannot allow themselves large budget deficits, because the markets will not allow them as high levels of public debt as the likes of Japan or the United States. Their bond yields will rise at even moderate debt levels, as Slovenia, Cyprus and Spain have discovered. Another way to look at it is that even when Krugman writes about European economic policy, he is actually only making arguments for what he believes the United States should do.
Citizens of the Baltic countries can be grateful that their leaders never listened to Krugman. He advocated devaluation when it proved unnecessary and probably would have been harmful. He has persistently argued for less austerity and more fiscal stimulus everywhere, blatantly disregarding the need for public debt to be sustainable. And the benefits of fiscal stimulus remain dubious, while the drawbacks -- excessive budget deficits have forced several countries to accept international bailouts to escape default -- are clear for all to see.
Krugman praises the fiscally irresponsible and scolds the virtuous, denigrating the Baltic achievements while trying to explain away miserable failures, such as Greece. Doesn't he see that his advice would only aggravate these crises, while the opposite policies resolve them? How can anybody be so wrong for so long without feeling at least a little bit ashamed?
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