Lender's Folly

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I think, the below excerpt provides delicious food for thought on the European crisis—the entire article is well-worth reading (see link below).

... it makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded. When, for example, Wolfgang Schaeuble, Germany’s finance minister, says:

The reasons for Greece’s problems can be attributable only to Greece and not to actors outside the country, and certainly not in Germany.

As he did during the press conference following his meeting with Yanis Varoufakis, his Greek counterpart, we have to remember that Schaeuble is talking nonsense. It’s logically impossible for excess borrowing to occur unless there is someone sufficiently reckless (or stupid) to provide the financing.

The problem with Schaeuble’s assignment of blame is that it prevents optimal solutions that are best for the majority of Europeans, Greek, Spanish, and German alike. Pettis:

An awful lot of Europeans have understood the crisis primarily in terms of differences in national character, economic virtue, and as a moral struggle between prudence and irresponsibility. This interpretation is intuitively appealing but it is almost wholly incorrect, and because the cost of saving Europe is debt forgiveness, and Europe must decide if this is a cost worth paying (I think it is), to the extent that the European crisis is seen as a struggle between the prudent countries and the irresponsible countries, it is extremely unlikely that Europeans will be willing to pay the cost.

In fact, Pettis thinks that, if anything, it was net lenders in Germany and the Netherlands who were responsible for what happened, rather than borrowers in Ireland or Greece or Spain:

It would be an astonishing coincidence that so many countries decided to embark on consumption sprees at exactly the same time. It would be even more remarkable, had they done so, that they could have all sucked money out of a reluctant Germany while driving interest rates down. It is very hard to believe, in other words, that the enormous shift in the internal European balance of payments was driven by anything other than a domestic shift in the German economy that suddenly saw total savings soar relative to total investment.

That shift, in turn, is connected to anaemic wage growth and even weaker domestic consumption in Germany.

The source.

 https://ftalphaville.ft.com/2015/02/06/2113951/michael-pettis-explains-the-euro-crisis-and-a-lot-of-other-things-too/