Moreover, it is essential that the structural reforms now under way across the deficit countries boost productivity. With domestic incomes squeezed, some of the required investment will have to be financed abroad. Unfortunately, the European financial system has aggressively renationalised in recent months.
Intra-European cross-border lending – which had been growing by 25 per cent per year in the run-up to the crisis – has been falling at a rate of 10 per cent per annum since. While the European Central Bank (ECB) has adroitly stepped into the breach, reliance on central bank lending is not a recipe for robust private investment.