Guardian
October 26, 2011
Imagine for a second that the crisis in the eurozone is over. A deal has been struck with Greece to cut its debts. Banks have sufficient capital to withstand losses on sovereign debt. Enough firepower has been marshalled to scare off the markets. Bond yields in Italy and Spain are on the way down; the heavy mob from the International Monetary Fund has jetted back across the Atlantic to Washington.
At that point, the temptation for policymakers will be to breathe a huge sigh of relief and relax. That, though, would be the wrong response since an even bigger challenge will present itself: how to get the economies of the 17 countries that make up monetary union moving again. The looming recession this winter will highlight the fact that, deep down, Europe's debt crisis is really a growth and employment crisis.
Predictably, there is no consensus about how faster growth could be achieved. Germany would like everybody to become more German, improving efficiency and cutting costs so that increased competitiveness boosts exports. Countries in the euro area have a common currency so they can't devalue, but it is possible for them to secure an internal devaluation by cutting wages and public spending. Reducing domestic costs through austerity programmes prices goods back into global markets in the same way that a cheaper currency does.
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