Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

It would later be said that the ECB should have done more to dampen the boom in Ireland and Spain. And it is clearly true that this was made more difficult by the fact that it set one interest rate for the entire eurozone. In effect, by setting low rates, the ECB prioritized the need to stimulate the German economy over restraining the boom in the periphery. It was a reasonable decision. Germany’s economy is far bigger. Furthermore, given the rates of return that beckoned in the hot spots of the European economy, it is wishful thinking to imagine that the ECB could have curbed the boom with a rate hike. If the EU’s business statistics are to be believed, investment in Spanish tourism and real estate offered rates of return of 30 percent or more. Little wonder that investment crowded in.39 In a world of globalized finance, the ECB could no more limit the flow of funds to such a hot spot than the Fed could choke off the capital inflow to the United States. Ireland’s banks were a case in point. They sourced their funding wholesale in the City of London, outside the ECB’s immediate purview.40 To have slowed the booms would have required not a mild tweak of ECB interest rates but a full-scale economic policy mobilization by the governments of the boom countries. This might have included tougher lending rules, throttling back growth in the banking system and even tighter fiscal policy. In the case of Spain, the larger, internationalized banks were, in fact, held on a tight leash...