"In the decade and a half before the crisis, countries such as Greece, Ireland, Portugal and Spain lost a lot of competitiveness. Low interest rates led to a surge in domestic demand. That, coupled with rigid labour markets in some places, led to sharp rises in nominal wages. At the same time productivity growth was not vigorous enough to compensate. By contrast, for a decade after its reunification boom turned sour in the mid-1990s, Germany took bitter medicine, holding wages down and boosting productivity. The result was a steady erosion of the peripheral countries’ competitiveness, especially relative to Germany."
This again draws attention to the difficulty of maintaining competitiveness in a single-currency union. External competitiveness depends on prices, which in turn is a function of exchange rate and cost of production. The former, which is the commonest instrument to manage export competitiveness, in unavailable for eurozone members. This leaves them with adjusting the cost of production by managing prices of goods and services and wages - internal devaluation. This can be done either by negative or slower price and wage growth (which carries the dangers of deflation), or increased productivity growth rates.
Increasing productivity, especially to the extent required to make any meaningful dent on real prices, may be difficult to achieve. This leaves with deflation as the only option available. However, as the Economist article highlights, the experience with deflation in other countries has not been very satisfactory. Deflation also carries the risk of increase in the real value of the already unsustainable debt burdens of the peripheral economies.
Further, far from any deflation, the peripheral economies today face a greater threat from inflation. The higher than eurozone average inflation rate in peripheral economies mean that their competitiveness relative to the others, especially Germany, is declining further. All this means that the options available for the troubled economies are limited and exit looks increasingly inevitable.
Further, as the graphic also indicates, external competitiveness is critical for the peripheral economies to not only match Germany, but also compete with China in many export markets.
In this context, Dani Rodrik, one of its supporters, has opined that "an amicable divorce is a better option than years of economic decline and political acrimony" and suggests that members "can rejoin, and do so credibly, when the fiscal, regulatory, and political prerequisites are in place".