Over the year, Northern and Southern European nations moved further and further apart, in prices, productivity, production cost. German exports became cheaper, because German workers get paid too little in a currency that is undervalued in Holland and Germany, and overvalued in Greece and Italy.
Cultural diversity, the obstacle to Euro’s functioning
Northern and Southern European countries always had different attitudes towards work, savings, inflation, leisure, strikes, and thus very different inflation rates.
Inflation rates always were different
Production cost (Unit Labor Cost) and accumulated inflation drifted apart further and further, year after year. Target 2 debt owed by the South to the North accumulated to about 1 Trillion Euro of unpaid (and unpayable) debt. The signs of doom were visible for a decade, but were swept under the rug until the problems became huge and unmanageable.
The Euro will only work if European diversity gets destroyed: Let Greek and Italians work harder then the Dutch, and Germans, And Germans need to spend more then Southern Europe. Equal attitudes would not suffice. It is not enough if Italian and Greek productivity and inflation move in unison with Germany, Holland and Austria. 13 years of divergence have to be undone.
Germany’s production cost increased 8% over 13 years, and Southern European cost increased 33%. This obviously causes a permanent and lasting trade imbalance.
Production Cost becomes more divergent over time
All proposed solutions involve European central government interference to force nations to change their traditional ways. Government interference in wages, prices, borrowing habits. The Greeks need to get forced to work and save like the Dutch, and the Germans enticed to increase wages and spend like the Italians.
Rules and agreements have been broken before (debt ceiling, no-bailout-clause, ..). There is no reason that new rules will finally be kept. Nor is it clear that such discipline is desirable and useful for the offending Southern European nations. Not only is the population fiercely protesting against austerity. They are right, austerityis strangling these nations and leads to recession.
Currency devaluation and revaluation due to market forces have been eliminated with the advent of the common European currency. Devaluation was the old and tried solution that maintained trade and debt equilibrium and needed no government interference.