Wednesday, 25 April 2012

Krugman on the cause of Europe's woes

Paul Krugman in Rogoff's Bad Parable writes that, apart from Greece, the cause of southern Europe's financial problems were huge private capital inflows rather than Government debt. Indeed, Government debt to GDP had been falling prior to the crisis.
What brought on the crisis were huge private capital inflows. Don’t think runaway politicians; think German Landesbanken lending money to Spanish cajas, fueling a real estate bubble.

So what was the big problem with the euro? Not so much that it promoted these flows; it probably did, but the GIPSIs aren’t the first economies bond markets have temporarily loved not wisely but too well. No, the key problem is lack of a way to adjust when the music stopped.

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