The U.S. and the European Union are “nowhere close to ending” the financial crisis and German-led austerity efforts may lead to a 1930s-style economic depression... Five years into the crisis...If Professor Krugman is right, after five years, we are still nowhere close to ending the current financial crisis.
Compare that to the experience of Iceland. Iceland put the same financial crisis behind it in three years.
Clearly, these two facts suggest that the US and the European Union should consider changing their current policies and look at the policies that Iceland adopted.
What they would find is that Iceland adopted the Swedish Model for handling a bank solvency led financial crisis. Under this model, the banks were required to recognize upfront the losses that they would incur on the excess debt in the financial system if the debt went through the long bankruptcy process.
By having the banks absorb the losses, Iceland protected its real economy and its society, including expanding its social programs.
“Europe must accept there are limits to austerity and that additional austerity won’t do anything but bring societies on the verge of collapse,” said Krugman, an economics professor at Princeton University. “No country will have prosperity until Germany and the ECB have decided that too much pain has been inflicted.”...
In Europe, the risk of protracted and extreme austerity measures may lead to “political upheavals, radicalization” and “terrible things happening,” he said. “It’s not difficult to see the decades ahead looking like the 1930s.”