Friday, September 23, 2011

The Euro crisis is nothing to do with budgets

Krugman and Mansori on the Origins of the Euro Crisis: it's all about capital flows. The countries now in trouble were not all running fiscal deficits, but they were all running trade deficits, and that seems to be the best predictor of sovereign debt crisis.

So it turns out that the 'recklessness' that Southern Europe supposedly engaged in was allowing German and other Northern European savers to invest their money there. Doesn't quite have the same ring as the morality tale about budgets.