There are some things that reasonable people can largely agree on regarding the eurozone’s problems: the monetary area is stuck in a crisis that has brought about unbearable unemployment to southern Europe. That problem cannot be solved satisfactorily through deflation since that would make bankruptcies soar among over-indebted households and companies. The crisis was triggered by the US financial turmoil and Germany accumulated large current account surpluses after the introduction of the euro that are the mirror image of the distressed countries’ deficits.

But reasonable people can differ: Niall Ferguson wrote recently in the Financial Times that the euro helped Germany because it created current account surpluses at the expense of the southern countries. This view is wrong. Current account imbalances are capital flows. When capital flows from country A to country B, A slows down and B experiences a boom. The booming country’s imports rise, while rising wages depress its exports. The opposite holds for the partner people. For that reason alone it is absurd to say that a country “profits” from a current account surplus or “suffers” a deficit. That notion was laid to rest in the 19th century.

The now-troubled countries were the recipients of the capital mobilised by monetary union. The euro eliminated exchange risk so investors in the southern countries accepted lower yields. Capital inflows fuelled booms that turned into bubbles, causing massive current account deficits. The bubble burst when investors refused to continue financing these deficits, leaving uncompetitive economies.