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The Hydraulic Theory of the Euro

Jean-Baptiste Queru recently posted what I call the "Hydraulic Theory" of currency union.  Other than an overall theme of "Blame Germany", it's somewhat discombobulated, but I think the basic point is:
The core mechanism that allows multiple states to share the same currency is pretty simple: since the weaker states can't devalue their currency to compensate for their trade deficit with the stronger ones, money has to flow from the stronger economies to the weaker ones in order to maintain the balance. Which is pointing out that balance of payments in an identity: your surplus + my deficit = 0
This identity doesn't cause the balance of payments, rather it merely identifies that if someone owes money, someone else must be OWED that money.  Consider if I told you that last year I racked up $20k in debt (credit card).  You could correctly infer that I spent $20K more than I made last year.  It would be ABSURD to say that the debt caused the spending! Rather…

Kevin Drumm's Crazy Uncle Ivan theory of Finance and Trade

In covering the Greek tragedy that is the Greek tragedy, Kevin Drumm espouses what I like to call the "Crazy Uncle Ivan" theory of finance and trade.  It's a popular mix of Mercantilism and Keynesianism which explains how rather than being the villain of this tragedy, Greece is actually the tragic hero.

Kevin quotes the German view of the situation:
"In Germany especially, the fear is that providing new loans to Greece without extracting more spending cuts represents a fateful step toward a so-called transfer union, with wealthier nations providing handouts to Greece and other weaker countries." The facts on the ground are quite clear.  Greece does in fact want German money, and there is really no way for Kevin and the liberal intelligentsia to deny this.  But perhaps if we step back, we can still blame Germany:
But so far Europe has done next to nothing for Greece. They've made lots of loans, but mainly so that Greece could pay back its debt to shaky Euro…