'European officials remain in deep denial about the fundamentals of the situation. They continue to define the problem as one of fiscal profligacy, which is only part of the story even for Greece, and none of the story elsewhere.'
Krugman is right to point out that many of the GIPSIs (Greece, Italy, Portugal, Spain, Ireland) had sound public finances until very recently. Spain, Ireland and Portugal were only thrown into financial turmoil when they had to bail out their banks. So no irresponsible spending by politicians there. But not all GIPSIs are the same. Greece and Italy are different. Their public debt is much older and has been accumulated over longer periods. Their debt is not the result of a single 'mishap' but reflect structural political problems. I have written about this before:
'In Italy, as in Greece, public debt has been run up over decades in the post war period. In Italy mainly since the early 70s. In this period, expenditure for the welfare state increased rapidly, but taxation did not keep up. This was in large part due to the political context. Italy was the only western country--together with Chile--in which an election victory of the communist party was a real possibility. Left wing terrorism added to the political pressure. However, while the christian democratic governments of the time were forced to expand welfare provisions, they were not willing to go against the interests of their constituents and tax businesses and higher incomes according to expenditure.'The different histories of public debt in the GISPI countries have important implications for the possible solutions to the debt crisis. In Spain, Ireland and Portugal it is possible to fix the short term consequences of the financial crisis along the lines that Krugman suggests. But in Italy and Greece things are more complicated. Throughout their existence they have been politically highly instable and this has not changed now. While Spain and Ireland are governed (badly) by stable democratically elected governments despite the crisis, Italy and Greece have gone into full political meltdown.
It will take more than ECB intervention, Eurobonds and stimulus in the European core to fix the problems of Greece and Italy. European politicians may be in denial about the causes of the debt crisis in some GIPSI but critics of austerity are not helping their cause by ignoring the heterogeneous histories of European debt.