Richard Koo wrote yesterday that basically you really can’t blame countries like Greece for their own competitiveness problem.  It was all ECB’s fault.

The idea was that Germany was suffering a balance sheet recession in early 2000s after the IT bubble while the south of Europe did not.  Maastricht Treaty prohibits euro area member state to run budget deficits of more than 3% of GDP, so fiscal stimulus was not available for Germany (note that Germany did breached the 3% deficit target though for a few years after the bubble).  Thus, according to Richard Koo, the only way to stimulate the German economy is for the ECB to ease monetary policy, which was appropriate for Germany, but inflationary for the rest of Europe.  And that was why there were bubbles in the periphery.


The chart below shows the outstanding loans in euro area by country.  As you can see, the lack of loan growth in Germany appears to be consistent with the idea that there was a balance sheet recession (or debt deflation, if you like) in Germany.  On the other side, you have what we now call the PIIGS countries which loans continued to grow.  Most notably here, of course, is Spain, with rapid loan growth fuelling its real estate bubble.


Source: ECB

This article originally appeared here: Chart: That balance sheet recession in Germany

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