ABSTRACT
The European integration was expected to encourage large inflows of foreign investment from the more developed to the less developed member countries: external imbalances would first widen, then narrow and eventually close as income levels would converge mainly because of export growth. This chapter discusses the role played by three aspects that differentiate the German economic system: the 'reforms' in the labour market, the structure of the housing market and of its finance system, and the spatial reorientation of German trade towards Eastern Europe and emerging Asia, especially China. The American subprime crisis spread across the world causing banking crises, state bail-outs, speculative attacks and deflationary measures. The core-periphery divergence and the increasing disequilibria in the external accounts have been attributed to various causes: from the loss of competitiveness of the Southern periphery with regard to Germany to the inflationary demand in Southern Europe, sustained by huge capital inflows.
