The economy became more efficient, more productive and competitive, particularly relative to many of its Eurozone partners. In the face of labour and product market inflexibility and higher wage growth in many of these countries, current account deficits were widening and were readily financed at low Eurozone rates of interest, given the prevailing assumption that all euro area sovereign bonds were the same.
As we have seen, this assumption no longer holds, but the divergences in competitiveness remain. It has been estimated that most of the peripheral European economies have lost competitiveness relative to Germany in the order of magnitude of between 20 to 30 per cent since the introduction of the euro.