The divide between north and south makes reforming the currency union a tortuous process at best
euro zone was first engulfed by a sovereign-debt crisis a decade ago, northern member states have dished out plenty of strictures. “Greece, but also Spain and Portugal, have to understand that hard work...comes before the siesta,” adviseda German tabloid, in 2015. Two years later, even as the crisis receded, Jeroen Dijsselbloem, then the Dutch finance minister, told southerners: “You cannot spend all the money on drinks and women and then ask for help.
In the first decade of the currency union cross-border bank loans fuelled public and private overspending in the south, which pumped up wages and eroded competitiveness. Current-account deficits widened, to 12% ofin Portugal and 15% in Greece. When crisis hit, private financial flows dried up. In Greece, Ireland, Portugal and Spain they were replaced by bail-out funds., also acted as a buffer, enabling central banks in the crisis countries in effect to borrow from others.
However, southerners rely less on financial flows from the north. In many places balance has replaced imbalance . Consider, for instance, the flow of funds between Germany and Spain. Spain’s current-account deficit with Germany has nearly closed. Mirroring that, net capital flows have shrunk. In 2006 German investors ploughed a net €50bn into Spain. Last year that fell to €3bn. The reversals partly reflect relative improvements in the south’s competitiveness.
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