Reasons for Euro crisis – Republican story, the German story, and the truth…..

Even though people may not agree to Paul Krugman most of the time, they have to agree that no one matches him in econ writing…He really is gifted when it comes to making a point…

In his recent post he looks at reasons for Euro crisis. He says people discuss three main reasons for the Euro crisis:

There are basically three stories about the euro crisis in wide circulation: the Republican story, the German story, and the truth. 

…The Republican story is that it’s all about excessive welfare states. How does that hold up? Well, let’s look at public social expenditures as a share of GDP in 2007, before the crisis, from the OECD Factbook..Hmm, only Italy is in the top five — and Germany’s welfare state was bigger

….the German story is that it’s about fiscal profligacy, running excessive deficits. From the IMF WEO database, here’s the average budget deficit between 1999 (the beginning of the euro) and 2007… Greece is there, and Italy (although its deficits were not very big, and the ratio of debt to GDP fell over the period). But Portugal doesn’t stand out, and Spain and Ireland were models of virtue.

…Finally, let’s look at the balance of payments — the current account deficit, which is the flip side of capital inflows (also from the IMF)… We’re doing a lot better here — especially when you bear in mind that Estonia, a recent entrant to the euro, had an 18 percent decline in real GDP between 2007 and 2009. (See Edward Hugh on why you shouldn’t make too much of the bounceback.)

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.

Really nicely put…Most of us will take nearly 1000 words more to explain all this…

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One Response to “Reasons for Euro crisis – Republican story, the German story, and the truth…..”

  1. AS Says:

    P. Krugman is a great blogger no matter whether you agree or disagree with him. Thought provoking ideas.

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