Crashed: How a Decade of Financial Crises Changed the World

by Adam Tooze

It was these credit-fueled booms that drove the trade and fiscal imbalances of the eurozone, rather than the other way around. The huge influx of credit from all over the world to a hot spot like Spain inflated economic activity there. This generated healthy tax revenues for Madrid, which proudly boasted a fiscal surplus. It also generated export orders for Germany. Foreign demand gave a boost to the languishing German economy, raising incomes and profits.38 But German households and businesses did not want to spend their income increment in Germany, on either consumption or investment. The German government borrowed, but not enough to soak up the difference. Through interbank markets, surplus liquidity in the north helped to fund business ventures around Europe. Some of that, not surprisingly, went to Spain. At the end of the day the accounts balanced. Germany’s savings appear as the counterpart to Spain’s trade deficit. But accounting identity is not the same as causal relationship. It wasn’t Germany’s excess savings, or its exports, that produced the boom in Spain. It was the lopsided credit-fueled boom that produced the demand imbalances, the trade flows and the savings imbalances. Europe’s banking system provided elastic intermediation. Had Germany’s domestic economy been in more robust shape, Germany’s demand for imports would have been larger, and the trade imbalances within the eurozone might have been smaller. A somewhat larger fraction of the Spanish economy migh...