Euro-induced cheap credit caused periphery current account deficits and vulnerability

Evidence

Despite the fact that national bonds were still issued by the same national governments, banks and other financial players loaded up with them, assuming that the risks we saw on the left-hand side of figure 3.2 had all been magically sponged away by adoption of the euro. This flooded the periphery states with cheap money, completely swamping local wholesale funding markets, thereby making them vulnerable to the capital flight that was to render them illiquid in 2011, while pumping up, in the case of Spain in particular, private-sector indebtedness. While the Northern lenders lent to local banks, property developers, and the like, periphery consumers used this tsunami of cheap cash to buy German products, hence the current account imbalances noted earlier. — Mark Blyth, Austerity, 221

Categorization

• XREF: Directly connects to the Northern-lender-to-Southern-borrower imbalance story common in the austerity literature and Mattei’s account. — connects to: REBLL growth was built on foreign borrowing and structurally vulnerable to external shocks — Mark Blyth, Austerity: The History of a Dangerous…, 595; The euro created bank incentives that produced a private crisis — Mark Blyth, Austerity: The History of a Dangerous…, 153; Euro adoption lowered PIIGS borrowing costs but did not fix underlying problems — Mark Blyth, Austerity: The History of a Dangerous…, 192 (+5 more)

Broader Connections

• Core European banks financed periphery consumption, creating Eurozone imbalances that later turned toxic #expands (0.88) — Mark Blyth, Austerity, 245
• The European debt crisis resulted from banking losses, not sovereign overspending #corroborates (0.80) — Mark Blyth, Austerity, 40
• The euro produced divergence among European economies rather than convergence #expands (0.80) — Mark Blyth, Austerity, 217
• The sovereign debt crisis is a transmuted and camouflaged banking crisis #corroborates (0.78) — Mark Blyth, Austerity, 35
• Capital-account liberalization creates surplus-deficit imbalances and boom-bust cycles #expands (0.75) — Natascha van der Zwan, Making Sense of Financialization, 34