Why would a currency union lead to credit crises? One answer is that divergences in relative costs lead to structural trade imbalances – large external deficits when the less competitive economies are close to potential output. The private or public sectors must then spend more than their incomes to sustain full employment. Such excess spending must, in turn, be financed from abroad. In the end, such lending will vanish. If the lending goes via the banking sector, as in Ireland or Spain, there will first be a financial crisis. If the lending goes via the public sector, as in Greece, the crisis will first be in state finances.
© Financial Times
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article