Over the first 10 years of the euro Southern Europe has suffered a massive loss of competitiveness and built up large current account deficits vis-à-vis the North. For many years, very little attention was paid to these imbalances. The global financial crisis, however, has put an end to the easy financing of these deficits and has revealed many weaknesses in the euro architecture.
Current account imbalances derived both from structural microeconomic factors (Germany's successful production restructuring) and from the asymmetric macroeconomic effects of the European Monetary Union or single currency on creditor and debtor countries.
The official policy, however, is that this adjustment should be entirely one-sided. Domestic spending must fall on debtor countries, with no offsetting expansionary policy in the creditors. As a consequence, growth has suffered and recession has hit all peripheral countries.
The present zero-sum-game approach is risky for the stability of the euro area. The right approach must combine more symmetrical macroeconomic fiscal adjustment with microeconomic policy measures aimed at encouraging productivity increases.
Cooperation and policy coordination are needed to avoid the present 'beggar thy neighbour' situation. In this regard, the new European Governance Framework could fruitfully be further integrated and more effectively used than it has been so far.