Will the Euro Zone Survive in the Next Decade Essay

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The euro area's crisis is part political, part economic In the run-up to the global financial crisis, the euro area looked very much like a microcosm of the world economy. The region as a whole grew in line with its long-term trend, and its trade position with the outside world was broadly in balance. However, the euro area's aggregate position masked large variations across the member states. In some parts of the region (notably countries on the geographical periphery), demand grew consistently faster than output; in others (like Germany), the reverse was the case. Profligacy in the periphery was funded by thrift in the "core". This arrangement suited both sidesófor a time at least. While countries in the periphery enjoyed debt-fuelled booms, countries such as Germany, where domestic demand was weak, could rely on exports to keep growing. It is tempting to ascribe the euro area's problems to fecklessness and irresponsibility in the periphery. In reality, things are more complicated. The truth is that virtue in the core was dependent on vice in the periphery: rising indebtedness in the periphery was simply the reverse side of export-led growth in the core. Or, to put the matter differently, it was precisely because peripheral countries lived beyond their means that countries such as Germany were able to live within theirs. The relationship between the euro area's core and periphery can be compared to that between China and the USóbut with two differences. First, the flow of capital from core to the periphery was the result of private-sector behaviour, not official intervention. Second, capital flows in the euro area generally went downhill, from wealthier member states to poorer ones, rather than uphill (as has been the case between China and the US). The euro area's problem was not so much the existence of

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