What is happening at the euro zone?

Why the current account mattered in the case of first private sector, then sovereign debt crisis. The answer goes something like this. A country that has its own currency is not really in risk of sovereign default. It can “print” its currency to pay off debt, which will worsen the exchange rate but solve the debt problem. Creditors get their money back, but bear the whole exchange rate risk. Also, the public sector can bail out the private sector to full extent if a real estate boom has caused hundreds of billions of loans to turn sour/toxic. Now, the euro zone is a different beast.

In the euro zone, countries cannot “print” their own money. Their debt is nominated in euros, which is equivalent to a foreign currency. In order to bail-out the financial sector sovereign debt has to be emitted in foreign currency and cannot be absorbed by domestic central bank operations. Of course, the ECB can act as a lender of last resort and give liquid funds for financial assets that are “distressed” – there is no buyer at all, or not enough buyers, or the price is too low, or all of these. In order to help the economy repay euro-denominated (foreign) debts, a positive current account would be important to secure an inflows of euros above what is needed to pay the import bill. That is why, in short, the current account matters in the euro zone’s indebted nations.

If the ECB would guarantee to provide (unlimited) funding for all euro zone governments, the financial troubles would go away.