Krugman on Greece

Paul Krugman writes in today's Times that Europe's political  decision to put monetary union before political union (i.e., a federal government with revenue and a balance sheet) was a mistake and a disaster (no dissent from me on that). He says that there is now no alternative for the PIGS other than austerity, balanced budgets and "grinding deflation". On that point I don't agree with him, Nobel Prize notwithstanding.

There is a way for the PIGS to restore competitiveness without deflation. If nominal wages were held steady, while the ECB targeted 3% inflation and/or 5% nominal GDP growth, real wages would decline steadily until competitiveness was restored. This is not to say that Greece does not require major surgery (a shrinking of the public sector and a functioning tax system), but it does not require deflation. 

However, my solution can't happen until the Germans are convinced that inflation targeting is a better goal for the ECB than price stability, which will happen when pigs fly. Greece has a central bank that prefers depression to growth. This is ultimately a recipe for bread riots, which the Greeks are already pretty good at.