58 TheEconomistNovember 9th 2019
1S
ince theeuro 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,” advised
Bild, a German tabloid, in 2015. Two years
later, even as the crisis receded, Jeroen
Dijsselbloem, then the Dutch finance min-
ister, told southerners: “You cannot spend
all the money on drinks and women and
then ask for help.”
Northerners’ constant fear of under-
writing southern irresponsibility has led
politicians from Amsterdam to Helsinki to
put the brake on banking reforms and fiscal
integration across the zone. It has caused
numerous fights over monetary policy, the
latest of which is in full swing. On Novem-
ber 1st the European Central Bank (ecb) re-
sumed quantitative easing (qe), the pur-
chase of bonds using newly created money.
The decision to do so, made in September,
was roundly attacked by newspapers—and
even former and current central bank-
ers—in northern countries including Ger-
many and the Netherlands. The com-plaints reflect savers’ dread of negative
interest rates and a suspicion that easing
lets indebted southern countries off the
hook. Together this can make monetary
policy seem like a source of transfers.
In reality, the matter of whether north
subsidises south is complicated. Gaps in
living standards remain wide, but cross-
border flows have become more balanced.
And the north is partly responsible for the
monetary policy about which it complains.
When the euro first came into being itshackled together a disparate set of coun-
tries. gdpper person in Greece, Portugal
and Spain was 30-40% lower than in Ger-
many. But Germany, still feeling the after-
effects of reunification, was battling slug-
gish growth and high unemployment. It
was rich, but others were richer. In Austria
average income per head was a tenth, and
in the Netherlands a fifth, higher than that
in Germany.
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 competitive-
ness. Current-account deficits widened, to
12% of gdpin 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.
target2, a payments system used to settle
accounts between national central banks
and the ecb, also acted as a buffer, enabling
central banks in the crisis countries in ef-
fect to borrow from others.
If you divide eight of the countries that
joined the euro before 2001 (ie, excluding
the mostly eastern late-joiners) into north
and south, it is clear that economic disper-
sion has widened (see chart on next page).
The north—Austria, Finland, Germany and
the Netherlands—has raced ahead, with
Germany aided by labour-market reforms.
The south—Greece, Italy, Portugal and
Spain—has fallen behind. France sits be-
tween the two. In 1999 its income per head
was nearly level with Germany’s. It ran a
current-account surplus. Today, with still-The euro areaRift in the union
At the heart of the euro zone’s seething tensions lies the claim that prosperous
northerners subsidise feckless southerners. Is it true?Finance & economics
59 Thetradewar’smini-truce
60 Distressed-debtfundsindespair
60 Theeconomicsofbillionaires
61 Buttonwood:Theilliquidity premium
62 Mexico’slurchleft
64 Thequandariesoflitigation finance
64 VideogamesandfraudAlso in this section66 Free exchange: Militant trade unions