There are basically three stories about the euro crisis in wide circulation: the Republican story, the German story, and the truth. The Republican story is that it’s all about excessive welfare states. The German story is that it’s about fiscal profligacy, running excessive deficits. The truth is it’s a balance of payments problem, in which capital flooded south after the creation of the euro, leading to overvaluation in southern Europe. And the key point is that the two false diagnoses lead to policies that don’t address the real problem. You can slash the welfare state all you want (and the right wants to slash it down to bathtub-drowning size), but this has very little to do with export competitiveness. You can pursue crippling fiscal austerity, but this improves the external balance only by driving down the economy and hence import demand, with maybe, maybe, a gradual “internal devaluation” caused by high unemployment.