Krugman's strategy can help save Spain

Sovereign bond purchases alone aren't enough for Spain. A more credible solution would involve rising inflation, and a coordinated strategy addressing Spain’s competitiveness.

The most urgent challenge is to find a more credible way of reducing the spreads on the Spanish and Italian bonds. The eurozone's current plan is insufficient; allowing the existing rescue funds (EFSF and ESM) to buy bonds on the open market will buy time but will not fix the problem. These funds just do not have enough financial firepower to make a long-term defence credible.

The basic problem is the existence of two equilibriums.

– The good equilibrium is where trust is high, so interest rates and low and the current stock of debt is sustainable – a fact that underpins the trust.



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