A lot of the criticism of peripheral countries in the euro area relies on an implicit comparison with households or firms. The argument goes like this: these countries borrowed excessively after they joined the euro at the end of the 1990s in order to live beyond their means and then got in trouble when they could not pay back the money. This argument is usually directed at the public sector in countries like Greece and Italy, at the private sector in Ireland and Spain, and at both the public and private sector in Portugal. These countries have all received their comeuppance and–like any firm or household in a similar situation–they now have to live within their means.

This analogy between countries on the one hand, and households or firms on the other hand, is misleading if not completely wrong. The reason is that countries do not ‘borrow’ in any conventional meaning of the term–at least not under normal circumstances. When things are going well, countries do not fill out an application with various lenders. They do not have to provide a business plan or show any bank statements. They do not offer up collateral or enlist the support of co-signers. These things only take place once a country gets into trouble and needs some kind of international bailout. ‘Borrowing’ for countries in a conventional sense means that something bad has already happened; it is the symptom and not the cause.

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