Paul Krugman in the New York Times today notes that in terms of debt projections, the UK is in worse shape than Spain, yet markets are acting as if Spain is highly risky, while treating UK bonds as a safe haven like US or German bonds—what’s going on?
To some extent this may reflect the reality that British growth prospects are better because of the depreciated pound, and also the fact that Britain won’t have to deflate the way Spain will thanks to (Spain) being on the euro. But I believe that De Grauwe is right that the most important factor is that Britain, which can turn to the Bank of England for financing if necessary, doesn’t face the risk of a run by creditors the way Spain does.
What’s needed, clearly, is for Europe — and ultimately that probably means the ECB — to provide for Spain and Italy the kind of backstop countries with their own currencies can provide for themselves. Without that, the whole euro system is at risk of unraveling, not over the course of years, but over the course of a few weeks.
Oh, and Britain should give thanks to Gordon Brown, who kept them out of the euro. The Spanish Prisoner - NYTimes.com
