Only simple souls believe that the euro zone crisis is really about the governments racking up excess debt. Some clever economists claim that the problem is far more profound than that. The likes of Hans-Werner Sinn of the Ifo Institute, Jean Pisani-Ferry of the Bruegel think-tank and Martin Wolf of the Financial Times reckon that the euro zone's sovereign woes are only a symptom of the real disease - cross-border trade imbalances within the single-currency bloc. This analysis makes the situation look even worse than it currently appears.
The pessimists start out with a good point: the single currency's most fiscally challenged governments are in countries that ran large current account deficits during the boom years. These deficits have to be financed by foreign capital inflows. Little of this capital went to build up productive industry. Some was used to finance government deficits and some ended up in the financial system, blowing bubbles. When the bubbles burst, tax revenue fell everywhere and in some countries banks needed government aid. Investors turned against the debtors.
While the cross-border debts are a problem, the doom-mongers say that the solution isn't necessarily to reduce them. An overly rigorous effort to balance national budgets could start a snowball of deleveraging, deflation and depression. And even if governments get a grip on their debt and deficits, then the continued presence of trade imbalances, localised financial excess, and emotionally unstable investors make for a volatile cocktail.
It's scary stuff. But the depression scenario is too gloomy, as it ignores the European Central Bank's capacity to create money, and national governments' ability to recapitalise banks and force them to keep credit flowing.
Above all, the pessimists are wrong to absolve governments from responsibility for creating the current crisis and preventing the next. States can choose not to run big deficits and they can choose to rein in their financial institutions.
If more euro zone governments had made the right choices, there would not be a euro sovereign debt crisis now. And if they are prudent in the future, there need not be another.
