Last week we had the summit of the European Union heads of government. Prior to that there was the meeting of the eurozone group. The agreement on the Fiscal Compact, which will require a change in the Constitution of a number of member states, was not signed by the Czech Republic and the United Kingdom.

The week before, 12 member states sent a letter to the European Commission arguing that priority needs to be given to growth and employment. That letter was not signed by either Germany or France.

All this gives a sense that there are no agreed positions on the solution to the eurozone and on how to face up to the challenge of an economic recession this year.

It may be that there are no agreed positions because there is no agreement as to what has caused the crisis we are in today. In fact, this was the subject of an article by Paul Krugman, a Nobel Prize winner in economics and a regular contributor to The New York Times.

Prof. Krugman is a liberal and a strong believer in free trade.

However, at the height of the crisis in the financial markets in 2008, he was also very critical of his country’s regulatory system because of its inability to keep pace with a financial system that got increasingly out of control.

Prof. Krugman argues that an analysis of the current crisis is based on one of two theories.

One theory is that Europe found itself in trouble because it has a very generous welfare system and that now we are witnessing the death of the welfare state. Prof. Krugman believes that facts disprove this theory.

Sweden, renowned for its generous welfare system, had found itself in a banking crisis brought on by deregulation in the early 1990s.

Today, Sweden still has a generous welfare system but is also experiencing a faster growth rate than that of any other wealthy nation.

He also cites the fact that Germany also has a much bigger welfare state than any of the countries that have found themselves in trouble. Thus facts show that an excessively large welfare state was not the cause of the EU’s economic problems.

The second theory is that the economic crisis in Europe is due to fiscal irresponsibility.

However, Prof. Krugman argues that even this theory is disproved by the facts. He argues that Spain and Ireland ran up fiscal surpluses before the onset of the crisis and that Italy’s deficits before the crisis were only slightly larger than that of Germany.

Italy’s large public sector debt is a result of the policies of many years ago. Moreover, over the last years, the United States, the United Kingdom and Japan have all ran up large deficits and carry large debts. Yet they did not have to face any crisis and are still paying a low interest rate.

So what has really caused the crisis in Europe? Prof. Krugman argues that the creation of the euro as a single currency was not accompanied by the creation of institutions that were needed to make the currency work.

The creation of the euro has put into motion the movement of private capital towards a number of states that would otherwise have been unable to attract such capital.

These high inflows of capital led to higher costs and prices, making businesses operating in such countries uncompetitive. The result has been that these countries started running large trade deficits.

Previously, such loss in competitiveness used to be remedied by a devaluation of the national currency. However, this can no longer be done with the euro and governments had to introduce policies that are intended to help to regain competitiveness but which are very painful to the populations they govern.

They are policies that are deflationary in nature and students of economics would tell you that in times of deflation, borrowers end up on the losing end.

The governments of the larger EU member states need to understand what has really caused the latest crisis, in order to mitigate the risk of implementing the wrong solutions.

The issue applies to our country as well. There are no quick-fix solutions in economic strategy, as each additional public sector expenditure or reduction in public sector revenues carries with it a range of consequences that need to be understood before (not after) decisions are implemented.