The introduction of a common currency, the Euro, created a potent cocktail for the less industrialized nations involved, especially the Mediterranean countries (including France). It allowed the highly efficient industries of the northern European powerhouses countries (Germany) to compete with their southern brothers on equal footing. The southern nations, with their relaxed lifestyles and less than robust industrial infrastructures, were unable to compete. Before the Euro, they were able to devalue their currency and thus lower the price of their goods (in terms of their competitors currencies). However the Euro locked them in. Instead of facilitating trade, industries in the south were outcompeted and hollowed out. Imports grew while exports shrank. Goods imported from Germany were increasingly being financed with more and more debt, not earnings.
(Un) Fortunately, because the southern brother’s currency was now the Euro and devaluation was not a concern; banks everywhere were willing to lend these nations money with abandon. While exports (earnings) and thus their private productive sectors declined, governments of these southern nations bloated up to fill the void left by their declining productive sector. Government, which of course earns nothing, financed itself by borrowing even more money. Government expansion maintained the illusion of economic activity. The problem was solved for a while.
So here we are now. The southern Euro nations have a shrunken and uncompetitive productive sector burdened with a huge government, and an enormous debt which cannot possibly be paid back. Austerity, or ‘internal devaluation’, is being pushed on them by the northern banking/political class. They want their southern brothers to start ‘living within their means’. However, as Milton Freedman proved, it is easier to spend more than it is to spend less. A gradual devaluation used to keep things in check, no longer. Now the northern Eurocrats are trying to hold back the inevitable by forcing their southern brothers to cut wages, employment, and benefits to kept the euro intact. The Italians are pushing back.
Watch Italy. I think Europe may devolve into class warfare. The Euro is a failed experiment.
Furthermore, it is a warning to others that a debt financed, bloated government is not the solution.