[tspareme]

The issue here is that we know Greece is not as competitive in exports as Germany. So what can Greece do to run a trade surplus while in a common currency union with Germany? They are not able to depreciate their currency. They are not allowed to put up tariffs either. Also, where does the German do with their export surplus. They don't just hide it under the mattress. German banks is also looking for a outlet, however, Greece is not allowed to implement capital control to block the inflow. So the only alternative is to out compete Germany or some other Euro-zone countries (but this just substitute Greece for some other PIGS).

The key here is that for everyone in the world, the trade surplus and deficit must sum to zero. So someone has to run a trade deficit if German/Japan/China wants to run a trade surplus. German now wants the entire eurozone to run a trade surplus which means someone else must run a even bigger trade deficit.

BTW, it is in theory possible for Greece to run a government budget surplus but a trade deficit. This would mean that the private sector is loading up on the debt. Even in this case, the private sector is really the banks which has to be backstopped by the government anyway. So bank debt is just another form of government debt.

[jahewson]

Yes, that is the core issue: can the Euro sustain both Germany and Greece given how diverse their economies are? I have my doubts, but perhaps what we're seeing is an emerging solution wherein Germany subsidises the weaker members of the Euro indefinitely. That still doesn't absolve Greece of financial responsibility but it would support their position of having a sizeable portion of their debts written off. It's a sort of sovereign welfare state...