The Eurozone’s Misplaced Orthodoxies

ATHENS – With the euro crisis still far from resolved, the currency union’s future remains at the center of heated debates. But, in many cases, positions have become so polarized that they miss the point, impeding the ability of EU policymakers to agree on and implement an effective crisis-response strategy.

Consider the question of who the euro’s real winners and losers are. Given that the eurozone is typically divided into two categories – the northern creditor countries and the southern debtor countries – this question can be understood in terms of whether a current-account surplus signifies economic success or failure.

According to the orthodox view, external-deficit countries “profit” from capital inflows, until increased imports and rising wages erode their current-account position further and investors stop financing their deficits. This means that any gains derived from sustaining a current-account deficit are temporary, illusory, and dangerous – suggesting that deficit countries are eurozone “losers.” After all, short-term booms soon become bubbles, and when bubbles burst, they trigger financial crises, eventually leading to default and depression.

This view also holds that capital flowing out of an external-surplus country means reduced investment, causing an economic slump. But history is far kinder to surplus countries, with exports having fueled the United Kingdom’s economic rise during the nineteenth century – a pattern that many other countries have followed. The UK then invested its accumulated foreign assets, gaining revenues that bolstered its financial position and limited its borrowing costs.