Sascha Engel on “Germany”, Asset Class Contagion, and Contagious Stability”

This paper reverses the order in which the Eurozone crisis is usually examined. Rather than a crisis of sovereign debt, caused by profligate peripheral governments and rectified by virtuous thrifty Germans, Latvians and Finns, I argue that the origin of the crisis is in the European banking system.

I concur with recent discussions that the European banking system, under distress from the 2007/2008 bank lending dearth, withdrew funds it had lavishly disbursed in the European periphery between 2003 and 2007, and invested them in Northern European countries instead. My article goes beyond the existing literature in examining by what rhetorical mechanisms the notion was constructed that this withdrawal was the fault of peripheral governments.

Specifically, I discuss the notion of ‘contagion’ – the mechanism by which the supposedly fiscal problems of one peripheral country were transferred to another country – arguing that it was the withdrawal of liquidity, not home-grown fiscal problems, which led to ‘contagion.’ By the same token, this means that the virtuous thrift of Germans, Finns and Latvians is not born of fiscal discipline, as their governments erroneously declare, but is likewise the result of portfolio allocations. Germany is not a safe haven because of fiscal discipline; Germany can afford fiscal discipline because of its safe haven status.

• This is Sascha Engel’s summary of his article “Germany”, Asset Class Contagion, and Contagious Stability that has appeared in the latest issue of the New Perspectives!