The euro has brought a balance-of-payments crisis to Europe, just as the gold standard did in the 1920s. Only one difference exists between the two episodes: In today's crisis, huge international rescue packages have been available.
These rescue packages have relieved the eurozone's financial distress, but at a high cost. Not only have they enabled investors to avoid paying for their poor decisions; they have also given overpriced southern European countries the opportunity to defer real depreciation in the form of a reduction of relative prices of goods. This is necessary to restore the competitiveness that was destroyed in the euro's initial years, when it caused excessive inflation.
Indeed, for countries like Greece, Portugal or Spain, regaining competitiveness would require them to lower the prices of their own products relative to the rest of the eurozone by about 30 percent, compared to the beginning of the crisis. Italy probably needs to reduce its relative prices by 10 to 15 percent. But Portugal and Italy have so far failed to deliver any such "real depreciation," while relative prices in Greece and Spain have fallen by only 8 percent and 6 percent, respectively.