Joe Stiglitz was in Europe to attend the World Economic Forum in Davos. He gave several interviews on the euro crisis. When a journalist of the Swiss Tages Anzeiger asked him if Greece would be better off outside the euro zone Stiglitz answered affirmatively:

‘Yes. The Greek currency was not overvalued when the country joined the euro. It is the euro that created the problem of overvaluation. Money flowing into the country created inflation that the Greeks could not control and this eventually led to an overvalued currency and all the further well-known problems.’

This explanation, that money or capital had ‘to flow’ into Greece before inflation could rise, is quite amazing. It would make Hans-Werner Sinn and other German conservative economists happy. Sinn has repeatedly claimed that capital inflows are the main cause of the crisis because these inflows induced domestic prices to rise above the target line set by the ECB.

I am not surprised when conservative economists use this fallacious argument, but to hear it from an economist who is widely regarded as a Keynesian is quite irritating. However, it proves what I have been saying for a long time: most Keynesians fail to understand that the Keynesian logic of domestic saving and investment (according to which investment precedes savings and not vice versa) also applies to international economic relations i.e. is relevant for the explanations of the saving of the economy as a whole, which means current account balances. Between countries, just as within one country, savings (the net outflow of foreign capital) do not precede investments (the use of capital abroad used to purchase goods or for investment). The reverse is true: the capital account balance follows the trade balance (Friederike Spiecker and I explained this in detail here – available only in German actually).The balance of payments identity (as well as the saving-investment identity) is absolutely silent about causation.

In a monetary union countries can have a higher inflation rate than others (originally caused by stronger wage growth) because there is no restriction to finance this inflation by using the national banking system. Each country in the European Monetary Union had sufficient ‘capital’ to grow faster than the others or to produce more inflation. The banks of each of the countries could simply create as much money as the real economy demanded with the interest rate set by the ECB. The monetarist doctrine of a given money supply (national money supply in particular in a monetary union!), as we have said infinite times, is a pure fiction. “Imported monetarism”, or the notion that a net inflow of “money” is necessary to create 2.8% of inflation (instead of the two per cent that were targeted by the ECB), which was approximately the Greek inflation rate in the first ten years of the EMU, is more than fiction, it is plainly wrong.