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“Borrowing … the Disease Is Incurable”

By the end of the 1980s, you could almost see the desperation in Europe's eyes. Economic growth was flat, other economies around the world were surging ahead, and the two obvious means of raising revenues to support entitlements had died of natural causes.

But the Great Experiment isn't called the Great Experiment for nothing. In 1992 the Maastricht Treaty established the European Union under its current name and required that all countries in the EU adopt the euro.¹⁸ From the very beginning it was recognized that one great advantage of the euro was that it would allow everyone in the currency union to borrow at rates formerly offered only to its most creditworthy states. The idea was that low borrowing rates would spur economic growth across the Continent.

This might actually have worked out as hoped—indeed, like the first two revenue-raising strategies, borrowing initially worked. In the aggregate, European growth rose, although in real terms most of that growth was isolated in the northern countries. There are, after all, good reasons for countries to borrow money. Short-term borrowing can smooth otherwise seasonal cash flows, for example. Long-term borrowing can be used to build out infrastructure—roads, railroads, pipelines, airports, the Internet backbone—which is really a form of investing in the long-term growth of the society.

When borrowing rates are low, and even more especially when low-credit countries are able to borrow at rates ...