The Eurozone Crisis Is Related To Trade Imbalances and Financial Flows From North to South

This article (via Manan Shukla) helps to explain the source of the debt problems in Greece and other eurozone countries. Greece has a current account deficit with Germany (Germany is the only surplus country in the eurozone). Countries that have current account deficits will also have lower GDP (negative net exports reduce GDP) and lower tax revenues which produce budget deficits. If Greece had its own currency it would decrease in value relative to the German currency and German cars would become more expensive in Greece. That would reduce its current account deficit by reducing German imports and increasing Greek exports.

Since Greece and Germany share the same currency, German exports remain cheap and Greek exports do not become less expensive. Greece must continue to borrow to fund its deficit. It can do so at low interest rates when investors believe that Greek debt is guaranteed. When this guarantee was lost, Greek interest rates exceeded the rate of GDP growth. This is the path to insolvency and default.