Krugman on the Fallacy of Composition

when everyone tries to pay down debt at the same time, the result is a depressed economy and falling inflation, which cause the ratio of debt to income to rise if anything. That is, we’re living in a world in which the twin paradoxes of thrift and deleveraging hold, and hence in which individual virtue ends up being collective vice.

The Default Setting is Ugly, but We Need to Switch to Cleanly
Krugman continues:

So what will happen? In the end, I’d argue, what must happen is an effective default on a significant part of debt, one way or another. The default could be implicit, via a period of moderate inflation that reduces the real burden of debt; that’s how World War II cured the depression. Or, if not, we could see a gradual, painful process of individual defaults and bankruptcies, which ends up reducing overall debt.

And that’s what is happening now: as this story in today’s Times points out, the main force behind the gratifying decline in consumer debt appears to be default rather than thrift.

So basically, we can do this cleanly or we can do this ugly. And ugly is the way we’re going.

One thing that struck about Wells and Krugman's article The Way Out of the Slump was the following:

It also means that the rest of Europe needs to start holding Germany to account: the Germans may regard themselves as models, but their surpluses after 2000, by flooding the rest of Europe with cheap money, played a large part in creating the real estate bubble in Europe’s peripheral economies. And Germany’s continuing reliance on export-led growth is in effect a beggar-thy-neighbor strategy of growing at its neighbors’ expense.

But wasn't Germany's cheap money good for the rest of Europe at the time? It was only when the bubble burst and the cheap money turned to expensive money that it hurt the periphery if I understand this correctly.