In a sense this has exposed the essential rift between liberal academic economists like Krugman and the real world. Liberals are driven first by the need to establish the goodness of their own intentions. It is not a surprise, then, to see Krugman suggest that Germany's good intentions actually matter in this debate. They don't - and it is beyond egregious for Krugman to throw around a Nazi insinuation like this.
What matters are results. Greece has received two bailouts so far and all of that, the money has circled the drain of the black hole that is Greek political society. As Europe - the European Central Bank has pierced the zero-level-boundary on their interest rate for holding onto bank deposits - hits the mathematical limits of Keynesian credibility, the dishonesty of Krugman's ideas will become evident. Krugman's system of thought is one with conveniently built-in excuses for failure. When an infusion of newly printed money - a bailout - does not work, Krugman's excuse is that it wasn't big enough. So when you infuse even more money into political society - a second bailout - and it doesn't work, the built-in excuse is deployed again; it wasn't big enough. So now we are supposed to throw more money at Greek political society hoping it will be "different this time?" Finally Europe's leaders are figuring this out; we can only hope they succeed in taking the lessons to their logical conclusion.
But that is unlikely to happen unless European civil society - Greece's included - realizes what has been going on for a generation now. Political society secures power by making promises which cannot possibly be kept. The financial sector prints up money to buy sovereign debt - at a profit to them, of course - so the falsehoods of these promises can be hidden from civil society - and political society can then keep making those false promises.
Today the credit rating of a country is no longer a measure of whether or not they can repay their debts; it is rather a measure of whether or not they can secure a loan to roll them over. Once you realize no one refinances a debt at a higher rate - and you see interest rates hitting the zero-level-boundary - the mathematical limits of Krugman's credibility become clear. This is why the debate now has to be about Germany's "good intentions." Krugman's built in excuse will not fly any more.
The logical conclusion of all of this is that economic growth simply does not come from political society. It comes from the creative enterprise of civil society when they innovate and improve things in the real economy. When political society 'pours' economic growth, it ends up like a stein of German beer with a huge head of foam. The head of foam makes it look like there is more beer than there is. And when the bubbles dissipate, it isn't "deflation" - it is what happens when the bartender at the Central Bank has no idea what he is doing. Thinking that throwing money at political society will produce economic growth is to mistake the head for the beer.
The next time I raise a toast (it will be a Bourbon barrel-aged Belgian Ale, though) it will be to the people of Greece. So much of what is beautiful in Europe was born in Greece. Maybe we will see there the birth of an energetic civil society and the proper restraining of political society which will then produce real economic growth and show the way for the rest of Europe.