The US 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, Nobel laureate Paul Krugman said.

Five years into the crisis, the US needs “another round of stimulus” and Federal Reserve officials “should be doing whatever they can” to aid the recovery, while Europe needs a fiscal union to save its single currency, Krugman said in a speech in Belgrade today.

“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.”

The European Central Bank and the Fed have unveiled plans to fight the crisis and reduce borrowing costs. ECB President Mario Draghi last month announced an unlimited bond-buying program for distressed euro-area nations, while Fed Chairman Ben S. Bernanke has committed to another round of so-called quantitative easing.

Stabilizing Yields

Europe needs to “contain immediately the financial threat to troubled countries and stabilize yields on their borrowing, which in the end requires the ECB to be ready to be the lender of last resort and buy sovereign bonds,” Krugman said. “And that is now sort of happening,” he said, adding “there are 60 per cent odds that they'll save the euro.”

In the US, where the recovery is struggling to gain traction, new fiscal stimulus should be “directed to distressed individuals” rather than companies, Krugman said.

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.”

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