It is now clear that the main cause of the euro crisis is the memberstates’ surrender of their right to print money to the European Central Bank.They did not understand just what that surrender entailed– and neither did the European authorities.

When the euro was introduced, regulators allowed banks to buy unlimitedamounts of government bonds without setting asideany equity capital, and the ECB discountedall eurozone government bonds on equal terms. Commercial banks found it advantageous to accumulate weaker countries’ bondsto earn a few extra basis points, which caused interest rates to convergeacross the eurozone. Germany, struggling with the burdens of reunification, undertook structural reforms andbecame more competitive. Other countries enjoyed housing and consumption boomson the back of cheap credit, making them less competitive.

Then came the crash of 2008. Governments had to bail out their banks. Someof them found themselves in the position of a developing country that hadbecome heavily indebted in a currency that it did not control. Reflecting thedivergence in economic performance, Europe became divided into creditor anddebtor countries.

When financial markets discovered that supposedly risklessgovernment bonds might be forced into default, they raised risk premiums dramatically. This renderedpotentially insolvent commercial banks, whose balance sheets were loaded withsuch bonds, giving rise to Europe’s twin sovereign-debt and banking crisis.

The eurozone is now replicating how theglobal financial system dealt with such crises in 1982 and again in 1997. Inboth cases, the international authorities inflictedhardship on the periphery in order toprotect the center; now Germany is unknowinglyplaying the same role.

The details differ, but the idea is the same: creditors are shifting theentire burden of adjustment onto debtors, while the “center” avoids its ownresponsibility for the imbalances. Interestingly, the terms “center” and“periphery” have crept into usage almostunnoticed. Yet, in the euro crisis, the center’s responsibility is even greaterthan it was in 1982 or 1997: it designed a flawed currency system and failed tocorrect the defects. In the 1980’s, Latin America suffered a lost decade; asimilar fate now awaits Europe.

At the onset of the crisis, a breakupof the euro was inconceivable: the assets and liabilities denominated in acommon currency were so intermingled that abreakup would have led to an uncontrollable meltdown.But, as the crisis has progressed, the financial system has become increasinglyreordered along national lines. This trend has gathered momentum in recentmonths. The ECB’s long-term refinancing operation enabled Spanish and Italianbanks to buy their own countries’ bonds and earn a large spread. Simultaneously, banks gave preference to sheddingassets outside their national borders, and risk managers try to match assetsand liabilities at home, rather than within the eurozone as a whole.

If this continued for a few years, a euro breakup would become possiblewithout a meltdown, but it would leave the creditor countries with large claimsagainst debtor countries, which would be difficult to collect. In addition tointergovernmental transfers and guarantees, the Bundesbank’s claims againstperipheral countries’ central banks within the Target2 clearing system totaled