Morning Must-Read: Matthew Klein: Michael Pettis Explains the Euro Crisis

…of the euro area’s problems we’ve ever read. You should take the time to closely read the whole thing yourself. We’ll wait. Now that you’re back, we thought we could add some value by highlighting and expanding on what we believe to be Pettis’s most important insights. First, the relevant units… aren’t countries but… sectors…. We shouldn’t forget that German workers have suffered from stagnant wages and decaying infrastructure…. Second, when it comes to big flows of capital across borders, it’s usually better to give than to receive… huge inflows of money are almost never matched by commensurate increases in the number of profitable investment projects, so a ton of money gets wasted….(Borrowing in a currency you can print is helpful but it doesn’t prevent a lot of resources getting misallocated and a lot of people ending up with excessive debt burdens.)…

Third, it makes no sense to blame the recipients of the capital inflows for causing the crisis. If enough money is sloshing around willing to invest in any stupid idea, you shouldn’t be too surprised that a lot of stupid ideas get funded…. Schaeuble’s assignment of blame… prevents optimal solutions that are best for the majority of Europeans, Greek, Spanish, and German alike…. Fourth, it matters how your obligations are structured. Many smart people, most notably Daniel Davies, have argued that the headline numbers surrounding Greece’s public debt burden are irrelevant to understanding the situation in Greece…. But the focus on flows misses the impact of the structure of the debt stock on the incentives of private sector lenders and producers…. This is why Pettis thinks Varoufakis’s plan to swap existing Greek debts for obligations indexed to GDP is a good idea…. That’s very different from the current setup, where the Troika has every incentive to tie its funding to the willingness to implement austerity programmes….

That leads to the fifth point: euro area officials are running out of time…. We at Alphaville have no insight into the future of monetary policy or global liquidity here or in Europe. But we wouldn’t be surprised if it turned out that the optimal window for restructuring, even if you leave aside the political implications of persistently high unemployment, could soon close. Something for the can-kicking eurocrats to keep in mind. Finally… nothing about the euro crisis is particularly new. All of this has happened before and all of it will (probably) happen again…