Unit labour costs soared, competitiveness declined. And the rigidity of labour and product markets meant that this process gained even more momentum. When the financial crisis broke out in 2007, the vulnerabilities became apparent: investor sentiment began to shift, and interest rates for the countries in question started to rise sharply, triggering a crisis that is still far from being fully resolved.
How could it go so wrong? Here is where the euro area’s unique institutional set-up comes in. The euro area teams up one common monetary policy with 18 national fiscal and economic policies. This approach reflects a currency area composed of sovereign member states.