How Germany Ate the Eurozone

A chart from Paul Krugman’s latest book, End This Depression Now! which goes a long way towards explaining WTF happened to the Eurozone.

It wasn’t profligacy by the Eurozone periphery, it was the massive trade imbalances created by cheap credit in the periphery and the export engine of the Germans.  Germany’s economy was driven by extracting cash from the periphery.  Nothing more.  Nearly all of the debt incurred in the periphery was private debt and not public  debt.  Then, when the bills came due (as in any asset bubble), the crisis manifested itself.  Germany ate the periphery and then blamed the periphery for getting eaten.

So the next time you hear some wingnut commenter saying that it was the public unions or the social safety net or the European spending on healthcare, you’ll know they’re lying.  Lying through their teeth.


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8 thoughts on “How Germany Ate the Eurozone

  1. Can’t help but lament the evolution of the EU. Its purpose was to form a bulwark against continental threats like Napoleonic expansionism, fascism and hyper-nationalism. But the supranational economy it proffered merely opened the globalization flood gates. What Germany is doing is antithetical to the very purpose of European confederation. It’s shameful. And how the EU is threatening Argentina is shameful. Just more proof that the originating ideas behind the EU have long been lost. Tyranny by another name is tyrannical all the same.

  2. Your root (cheap credit and ‘export engine’) hasn’t been established. I would be inclined to ask why other EU countries could not get the credit or put out a good product…

    1. I turn to Krugman again who can articulate it far more cogently than I can.

      What we’re basically looking at, then, is a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. It’s not a perfect fit — Italy managed to have relatively high inflation without large trade deficits. But it’s the main way you should think about where we are.

      And the key point is that the two false diagnoses lead to policies that don’t address the real problem. You can slash the welfare state all you want (and the right wants to slash it down to bathtub-drowning size), but this has very little to do with export competitiveness. You can pursue crippling fiscal austerity, but this improves the external balance only by driving down the economy and hence import demand, with maybe, maybe, a gradual “internal devaluation” caused by high unemployment.

      Now, if you’re running a peripheral nation, and the troika demands austerity, you have no choice except the nuclear option of leaving the euro, coming soon to a Balkan nation near you. But non-GIPSI European leaders should realize that what the GIPSIs really need is a general European reflation. So let’s hope that they get this, and also give each of us a pony.

      With regard to the program of austerity, I’m reminded of what Indiana Jones and Sallah said when they discovered the Germans were using the wrong sized staff:

      They’re digging in the wrong place!

      Social welfare programs aren’t the problem, the inability to conduct a round of internal devaluation due to trade imbalances is.

    1. That’s the narrative of the “austerians.” That’s the narrative for which there is no basis in fact (except maybe for Greece). Spain suffered a massive housing asset bubble, for instance.

  3. Had the PIIGS had balanced budgets, their economic issues would be far less severe.

  4. Ireland, once a bustling economy featuring digital proficiency ended up with a lot of worthless German commercial paper that almost totally did them in.

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