Financial Times
July 25, 2012
The way the eurozone’s imbalances are being unwound is poisoning what solidarity the monetary union used to possess. But it is not sufficiently appreciated that these imbalances were driven by private investors. When money flowed from, say, Germany to Spain or Ireland, it did so between the stewards of Germans’ savings – banks, insurance companies, pension funds – and Irish and Spanish banks.
Today’s debt crisis, too, arises from private investment decisions that may make individual sense but are collectively irrational. Politicians are unable to solve it because they have succumbed to the same irrationality.
In the euro’s first decade these private investors funnelled enormous flows from the richer, older, and higher-saving core to a poorer, younger periphery that seemed to offer better investment opportunities. In practice, they merely offered hungrier borrowers.
Investors are now trying to reverse these flows. The credit drought in the periphery; abnormally high yields in some countries and abnormally low ones in others; the renationalisation of Europe’s banking system – all are symptoms of surplus country creditors trying to repatriate the claims they have accumulated on deficit country debtors.
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