The Syriza Party took power in January of this year, and immediately began to issue one inflammatory statement after another, demanding an end to the troika’s austerity program. American bloggers were divided on the effectiveness of the Syriza strategy, with Krugman quite sympathetic to the leftist government. Here’s Paul Krugman on February 27th:

Last week, after much drama, the new Greek government reached a deal with its creditors. . . . Greece came out of the negotiations pretty well, although the big fights are still to come. And by doing O.K., Greece has done the rest of Europe a favor.

In contrast, here was Tyler Cowen (who’s been remarkably prescient about Syriza), from 10 days earlier:

I do not assume Syriza — whom I have called The Not Very Serious People — have a coherent bargaining strategy at all. I take this point from a broader reading of history, where I see that quite often leaders in critical positions simply do not know what they are doing. By no means is that always the case, but it is more often the case than narrative-imposing journalism encourages us to perceive.

And here’s Krugman on July 5th, in a post entitled “Europe Wins“:

Tsipras and Syriza have won big in the referendum, strengthening their hand for whatever comes next. But they’re not the only winners: I would argue that Europe, and the European idea, just won big — at least in the sense of dodging a bullet.

I know that’s not how most people see it. But think of it this way: we have just witnessed Greece stand up to a truly vile campaign of bullying and intimidation, an attempt to scare the Greek public, not just into accepting creditor demands, but into getting rid of their government. It was a shameful moment in modern European history, and would have set a truly ugly precedent if it had succeeded.

And then yesterday morning:

The thing is, all the wise heads saying that Grexit is impossible, that it would lead to a complete implosion, don’t know what they are talking about. When I say that, I don’t mean that they’re necessarily wrong — I believe they are, but anyone who is confident about anything here is deluding himself. What I mean instead is that nobody has any experience with what we’re looking at. It’s striking that the conventional wisdom here completely misreads the closest parallel, Argentina 2002. The usual narrative is completely wrong: de-dollarization did *not* cause economic collapse, but rather followed it, and recovery began quite soon.

There are only terrible alternatives at this point, thanks to the fecklessness of the Greek government and, far more important, the utterly irresponsible campaign of financial intimidation waged by Germany and its allies. And I guess I have to say it: unless Merkel miraculously finds a way to offer a much less destructive plan than anything we’re hearing, Grexit, terrifying as it is, would be better.

And then yesterday afternoon:

Suppose you consider Tsipras an incompetent twerp. Suppose you dearly want to see Syriza out of power. Suppose, even, that you welcome the prospect of pushing those annoying Greeks out of the euro.

Even if all of that is true, this Eurogroup list of demands is madness. The trending hashtag ThisIsACoup is exactly right. This goes beyond harsh into pure vindictiveness, complete destruction of national sovereignty, and no hope of relief. It is, presumably, meant to be an offer Greece can’t accept; but even so, it’s a grotesque betrayal of everything the European project was supposed to stand for.

Can anything pull Europe back from the brink? Word is that Mario Draghi is trying to reintroduce some sanity, that Hollande is finally showing a bit of the pushback against German morality-play economics that he so signally failed to supply in the past. But much of the damage has already been done. Who will ever trust Germany’s good intentions after this?

A few hours later Greece accepted that unacceptable offer. What can we learn from all this?

1. Monetary “exit” is really frightening to most people, even most people on the left. In 1929 and 1930 the Labour Party in the UK opposed exiting the gold standard, despite high and rising unemployment. The Democratic Party platform in 1932 favored the gold standard. In 1933, important parts of America’s labor movement opposed FDR’s devaluation policy. A number of top FDR officials resigned in protest, including the Secretary of the Treasury.

From the beginning I was much more skeptical of Syriza than [was] Krugman. I opposed their referendum, and (unlike Krugman) would have voted yes. After the referendum I argued that the no vote might not sway the creditors. But I have to admit that in some respects I misread the Greek views almost as badly as Krugman did. Even 10 days ago I could not imagine Syriza accepting a deal like this—especially considering the well known fondness for FDR among top Syriza officials like Varoufakis. It turns out that although lots of leftist economists (and even some right wing ones) think Greece would be better off exiting and devaluing its currency—the politicians on the left find that option just as unthinkable as those in the center or on the right. That surprised me.

2. The hard constraint imposed by a single currency makes European countries behave more like (American) states than countries. Think about it. State debts tend to be much smaller than the Federal debt. States are desperately struggling to bring pension costs under control, while 70 Congressional Democrats call for “expanding” Social Security benefits. The top Federal income tax rate is 43.4%, while the highest top bracket at the state level is 13.3%. Taxes are much more regressive at the state level. Individual states don’t try to boost AD in recessions. Because states are forced to live within their means, economic policy is in some sense more “conservative.” By conservative, I don’t mean precisely “free market”—local officials give big tax breaks to individual firms to get them to move into their state, a conservative policy that is not free market. In contrast, the US Federal government doesn’t give tax breaks to individual firms to get them to move from France to America.

3. This means that in some sense the EU might be seen as a vast right wing conspiracy to bring conservative economics to Europe. Nationalism prevents complete political union in the EU. And without complete political union you can’t have fiscal union. But they already have monetary union and free trade in goods, capital and labor. And it seems there is no going back and no going forward. This policy mix forces individual countries to become more conservative. That’s not to say Europe will suddenly move to laissez-faire, the changes will occur at the margin. It just so happened that Greece faces a much more severe constraint than some of the others, and hence will have to change quite dramatically.

Krugman’s actually right that Greece leaving the euro should not be viewed as unthinkable. But it turns out that it is, and as a result his political analysis was way off base. American macroeconomists tend to view things from the perspective of a national government that can control its own aggregate demand. That model no longer applies to Europe, and the one European institution that does have the technical ability to act—the ECB—is also constrained by a strict monetary constitution, and a conservative mindset. In that sort of world the only way for countries to succeed is to make their economy as competitive as possible, and stop running large deficits. Britain (which is outside the euro) just announced a huge rise in their minimum wage rate, while the Spanish government is desperately trying to hold down costs with labor market reforms. The German virtues are now hard-wired into the eurosystem.

PS. I hope it goes without saying that NGDP targeting would be especially useful in the eurozone, given the lack of room for fiscal stimulus.