From The Economist's Free Exchange blog:
How the euro was saved
...In June, Peter Berezin of the Bank Credit Analyst adopted the viewpoint of someone looking back on the crisis from the year 2021, and described what today must seem like a hopelessly idyllic outcome:
In the end, the common currency survived. Indeed, over the past five years, growth has accelerated sharply and debt levels and borrowing spreads have continued to come down… While it was hard to imagine during the dark days of 2012, European stocks have outperformed all other major markets over the past decade.How did Europe get there? The reports of BCA, a Montreal-based research shop, stand out for how incisively they diagnose the causes of the euro crisis and the plausibility of the scenarios they sketch for its resolution. Mr Berezin's June report accurately pinpoints the source of the crisis: persistently higher inflation and slower productivity growth in the periphery led to growing current account deficits with Germany. Ordinarily, such deficits are solved by devaluation. In a monetary union that's impossible; it requires either prolonged deflation in the periphery, systematically higher inflation in Germany, or default - either explicit, or via euro exit.
It is fear of this last outcome that is driving the periphery's vicious circle of rising bond yields, austerity, recession and deficits. Breaking that circle requires restoring risk-free status to peripheral government debt. That could be done via explicit debt mutualization through Eurobonds (i.e. Germany is on the hook for Italy’s debts) or the European Central Bank, with its unlimited buying power, becoming lender of last resort....MUCH MORE