Who — I’m being serious, seriously — didn’t see this coming?
If you have successfully arranged an economic union to be a favorable zone for your own exports, and you allow those countries importing your goods — which have favorable prices for a host of savory — economies of scale! declining average costs! — and less savory reasons — artificially depressed wages! temporary work permits that come with even lower wages and don’t come with healthcare! — and then you lend those sovereign states a bunch in order to import those goods, which boosts your current account balance at the expense of Portugal’s, Italy’s, Greece’s, etc, while you are simultaneously investing in bubbles in Iceland, Ireland, Spain, the US, and elsewhere (but I digress), and then you start demanding that those greedy piggy PIIGS start paying for their folly at whatever the cost (to the point of giving kids up for adoption because parents can’t afford them), at some point, your customers will stop importing your manufacturing sector’s output. I’m sure that Keynes said something about this, but a more contemporary source puts it well, too.
Here’s an extended quote from Ha-Joon Chang:
It is increasingly accepted that these policies are not working in the current environment. But less widespread is the recognition that there is also plenty of historical evidence showing that they have never worked. The same happened during the 1982 developing world debt crisis, the 1994 Mexican crisis, the 1997 Asian crisis, the Brazilian and the Russian crises in 1998, and the Argentinian crisis of 2002. All the crisis-stricken countries were forced (usually by the IMF) to cut spending and run budget surpluses, only to see their economies sink deeper into recession. Going back a bit further, the Great Depression also showed that cutting budget deficits too far and too quickly in the middle of a recession only makes things worse.
As for the need to cut social spending to revive growth, there is no historical evidence to support it either. From 1945 to 1990, per capita income in Europe grew considerably faster than in the US, despite its countries having welfare states on average a third larger than that of the US. Even after 1990, when European growth slowed down, countries like Sweden and Finland, with much larger welfare spending, grew faster than the US.” (6/4/12, The Guardian)
(Go read his whole piece here.)