Economy 16 May 2012 Eurocrisis, 1998 Ten months before the euro was introduced, Paul de Grauwe described the present crisis. Print HTML It may look like Citi were prescient in coining the word Grexit – and assigning a 50 per cent probability of it happening – back in February, but Gavyn Davies of the Financial Times points out some really impressive foresight. In 1998, before the euro had even been formed, Paul de Grauwe described a possible European financial crisis with remarkable similarities to the present one: Suppose a country, which we arbitrarily call Spain, experiences a boom which is stronger than in the rest of the euro-area. As a result of the boom, output and prices grow faster in Spain than in the other euro-countries. This also leads to a real estate boom and a general asset inflation in Spain. Since the ECB looks at euro-wide data, it cannot do anything to restrain the booming conditions in Spain. In fact the existence of a monetary union is likely to intensify the asset inflation in Spain. Unhindered by exchange risk vast amounts of capital are attracted from the rest of the euro-area. Spanish banks that still dominate the Spanish markets, are pulled into the game and increase their lending. They are driven by the high rates of return produced by ever increasing Spanish asset prices, and by the fact that in a monetary union, they can borrow funds at the same interest rate as banks in Germany, France etc. After the boom comes the bust. Asset prices collapse, creating a crisis in the Spanish banking system. Even de Grauwe couldn't have predicted the extent to which the Greek crisis would contribute to eurogeddon, though. The falsification of Greek accounts didn't come to light until 2004, and it is that, arguably, which set everything that followed in motion. › PMQs review: The battle for economic credibility rolls on Euro celebrations in brighter days. Photograph: Getty Images Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter. From only £1 a week Subscribe More Related articles The free market? There's no such thing Housing associations are under pressure - but we're doing our best Why is the government giving £45m to Roman Abramovich while letting a British steelworks go to the wall?