As a consequence, Europe is unlikely to return to its pre-crisis level of GDP until a full seven years after the start of its last recession. Given ties of trade, finance and confidence, the rest of the world is feeling the effects. Europe’s contraction is driving banking losses and fiscal shortfalls.
But these challenges are merely symptoms of an underlying sickness: a balance of payments crisis. To repay the creditors in the core, the debtors of the periphery must regain competitiveness. This will be neither easy nor quick. The burden cannot solely be on increasing unemployment and reducing wages in countries like Spain.