Europe is in an existential crisis, but their leaders remain oblivious to the cause. The root is not the deficits, but the bulging account imbalances that were produced by excessive bank lending to wobbly sovereigns in the south. The capital flows vanished after Lehman crashed leaving many of the countries underwater without sufficient tax revenues to make up the difference. Here’s a clip from an article by The Center for European Reform titled “Why Stricter Rules Threaten the Eurozone” without question , the best and most comprehensive analysis of the debt crisis to date:
“How did the eurozone come to find itself in its current predicament?
The short answer is that the introduction of the euro spurred the emergence of enormous macroeconomic imbalances that were unsustainable, and that the eurozone has proved institutionally ill equipped to tackle….
It is wrong, however, to blame government profligacy for the rise in peripheral indebtedness: Greece is the only country where this holds true. In Ireland and Spain, it was the private sector (particularly banks and households) that was to blame. Indeed, in 2007, the Spanish and Irish governments looked more virtuous than Germany’s: they had never broken the fiscal rules, had lower levels of public debt and ran budget surpluses.
The eurozone has entered a new and “more dangerous phase of the crisis”; a phase in which more of the burden will fall on politicians to make a course correction, to abandon the policies of austerity and debt deflation, and to rebuild their flagging economies with generous doses fiscal stimulus to avoid a banking system collapse and another protracted slump.
