"The underlying problem in the euro area is the exchange rate system itself – the fact that these European countries locked themselves into an initial exchange rate, i.e., the relative price of their currencies, and promised to never change that exchange rate. "
" This amounted to a very big bet that their economies would converge in productivity "
some combo of
" Greeks (and others in the “periphery”) would in effect become more like the Germans."
and or
"people would move – i.e., Greek workers go to Germany and converge to German productivity levels by working in factories and offices there."
'In fact, the opposite happened. The gap between German and Greek (and other peripheral country) productivity increased, rather than decreasing, over the past decade."
" Germany, as a result, developed a large surplus on its current account – meaning that it exports more than it imports. The other countries, including Greece, Spain, Portugal and Ireland, had large current account deficits – they were buying more from the world than they were selling. These current account deficits were financed by capital inflows (including from Germany but also through and from other countries)."
"In theory, these capital inflows could have helped peripheral Europe invest, become more productive, and “catch up” with Germany. In practice, the capital inflows – in the form of borrowing – created the pathologies that now roil European markets"
