It’s all Greece’s fault. That’s what a lot of Europeans secretly—or not so secretly—think as they grumble at the prospect of coming up with yet more money to bail the eurozone out of its debt crisis. But what if that easy view of how Europe landed in its current predicament is not just simplistic, but wrong?

Nonsense, argue the grumblers. Clearly the crisis started because debt in the eurozone’s periphery—Greece, Ireland, Portugal, and Spain—became so large that investors grew frightened that entire countries were at risk of default. If those countries hadn’t racked up all that debt by shamelessly living beyond their means, then none of this would have happened. But this narrative misses a crucial element of the true origin of the eurozone debt crisis. In particular, it misses the fact that the very design of Europe’s common currency area not only caused, but was meant to cause the eurozone’s periphery to incur large amounts of international debt. Further, there was little that the governments of those countries could do to stop it. Far from causing the crisis, the peripheral eurozone countries were up against powerful forces outside their control, forces that probably made this crisis inevitable no matter how responsibly they behaved.





ONE OF THE PRINCIPAL goals of Europe’s common currency has always been to promote greater financial market integration between member countries. It was hoped that the common currency would make it easier for investors in one euro country to find good investment opportunities in other euro countries because they would no longer have to worry about fickle exchange rates. In other words, one of the perceived benefits of the euro was to make it easier for capital to flow from countries with abundant capital, and thus relatively low returns to investments, to countries that were relatively capital-poor, and that therefore offered high returns on investments. This is considered a crucial ingredient in the process of economic convergence, in which less developed countries catch up with the more developed.

In the case of Europe, the capital-rich countries were at the core of the eurozone: Germany, France, the Benelux countries, Austria, and Finland. The adoption of the euro by the periphery countries in 1999 allowed lenders in the eurozone’s core to take advantage of relatively high rates of return in the periphery. And the periphery countries, in turn, were able to benefit from the influx of capital that reduced borrowing costs. In a nutshell, the adoption of the euro as a common currency was designed to cause large capital flows from the eurozone core to the periphery—and it is those very capital flows that set the stage for the crisis.