European Union leaders have reached agreement on a big €750 billion ($870 billion) recovery fund intended to help the EU member states hit hardest by COVID-19. But Hans-Werner Sinn argues in Project Syndicate that during the lengthy negotiations over the package, it became increasingly clear that Europe’s pandemic-induced economic crisis is an extension of the euro crisis that has been festering since the collapse of Lehman Brothers in 2008.

In essence, this is a competitiveness crisis brought about by the distortion of relative prices within the eurozone, which is a result of inflationary overpricing in Southern European countries. This overpricing, in turn, stemmed from the flood of capital that entered these economies after they joined the euro.

The collapse of the euro bubble following the 2008 financial crisis reversed the direction of private capital flows, leading to several rounds of intense capital flight from the Mediterranean region to Germany. This was reflected in a surge in the so-called TARGET balances that measure net payment orders and provide a sort of public overdraft credit within the eurozone. And now COVID-19 has triggered another phase of capital flight that eclipses all the others.

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