It’s time to get rid of the myth that market competition is the overwhelming source of innovation (and competitive advantage). The truth is that the government plays a huge role as the ultimate risk-taker and financier and through social co-ordination (between firms and workers, firms and banks, and firms and the state). The strength of Germany’s core sector is testimony of the enduring power of co-operative and regulated capitalism.

Europe needs a hand-on industrial policy with government investment in innovations like renewable energy systems, public transport and education and health. Countries like Greece in the periphery need help in the task of industrial restructuring and upgrading. Resources should be going from countries like Germany to them instead of the other way around.

If the Eurozone continues the path of market mythology, imbalances and inequality will get worse. And if that happens, well, Yeats said it best: “Things fall apart; the centre cannot hold / Mere anarchy is loosed upon the world.”


The Eurozone crisis is a banking-sector crisis – and not a sovereign-debt crisis or a crisis of labor cost-competitiveness. Banks, especially the big ones, were all too eager to lend to firms, households and governments in the Eurozone periphery, in their euphoria creating a “credit glut” which they knew they could get away with if things went wrong. European integration has been primarily a process of financial integration – with credit flows between countries growing much faster than anything else. Eurozone banks are even bigger than U.S. banks. They got rescued, and still get pampered, while the population got stuck for the damage of their miscalculations (or misbehavior).
We should debate the role played by banks and financial markets and how we can make them pay for the crisis. We need ask questions about how socially efficient the deregulated financial sector actually is, if it can be improved, and whether or not we really need Big Banks.



A country is not competitive because its workers are paid less than those in other countries. It’s the country’s high-tech or lower-tech production and what kinds of exports it specializes in that drive economic success. The imbalances between countries in the Eurozone were actually driven by capital flows from Europe’s core (Germany and France) to the periphery (Greece, Portugal, etc), which increased by a lot following the creation of the euro. Most of it was bank debt (not equity) and it was happily lent (directly or indirectly) to project developers and construction firms in Spain, fueling Spain’s property bubble, and to Greece’s already indebted government (which was considered almost as creditworthy as the German one just until the crisis broke).
So imbalances, in our explanation, were driven by the inflow of cheap foreign credit. These foreign loans were used to finance extra spending, a major part of which was on imports —basically machines and luxury cars manufactured in Germany. The surge in imports created deficits on the trade balances of the Southern European economies, but these imbalances had nothing to with rising relative unit labor costs or “excessive” wage growth in the periphery. By blaming the European crisis on wages and the cost of labor and ignoring the role of credit flows within the monetary union, economists are letting Big Banks off the hook – absolving them from any responsibility, leave alone blame – and unjustifiably so.