The first two components of the euro crisis – abanking crisis that resulted from excessive leveragein both the public and private sectors, followed by a sharp fall in confidencein eurozone governments – have been addressed successfully, or at least partly so. But that leaves the third,longest-term, and most dangerous factor underlying the crisis: the structural imbalance between the eurozone’s northand south.
First, the good news: The fear that Europe’sbanks could collapse, with panickedinvestors’ flight to safety producing aEuropean Great Depression, now seems to have passed. Likewise, the fear, fueledentirely by the European Union’s dysfunctional politics, that eurozonegovernments might default – thereby causing the same direconsequences – has begun to dissipate.
Whether Europe would avoid a deepdepression hinged on whether it dealtproperly with these two aspects of the crisis. But whether Europeas a whole avoids lost decades of economic growth still hangs in the balance,and depends on whether southern European governments can rapidly restorecompetitiveness.
The process by which southern Europe becameuncompetitive in the first place was driven by marketprice signals – by the incentives those signals created forentrepreneurs, and by how entrepreneurs’ individually rational responses playedout in macroeconomic terms. Northern Europeans with money to invest werewilling to lend on extraordinarily easy terms to those in the south who wantedto spend, and ample pre-2007 spending made employers there willing to raisewages rapidly.
As a result, southern Europe adopted an economic configuration in whichits wage, price, and productivity levels made sense only so long as it spent
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