The financial crisis of 2009 is morphing into the fiscal anxieties of 2010. This is particularly true inside the eurozone. Spreads between rates of interest on Greek bonds and German bunds touched 3.86 percentage points in late January (see chart). The risk has emerged of a self-fulfilling confidence crisis that would have dire consequences for other vulnerable members. Much attention has focused on what might happen if the crisis were not resolved, with talk of bail-outs, defaults or even exits from the euro. But what would need to be done to resolve the crisis, without such a calamity? It is the demand, stupid.

Conventional wisdom in the eurozone is that the crises are the result of poor policy-making in peripheral countries. In particular, fiscal policy has been too loose and economies too inflexible. The wages of such sins are austerity. Then, after a lengthy penance, the lost sheep returns to the fold of stability.

Greece fills the role of such a sinner to perfection, as I noted three week ago: its government admits that the country has fabricated its figures. Yet Ireland and Spain have also experienced dramatic fiscal deteriorations, with the general government financial deficit forecast by the Organisation for Economic Co-operation and Development to deteriorate by more than 12 per cent and 10 per cent of gross domestic product, respectively, between 2007 and 2010. These countries were not long-term fiscal sinners.