Unfortunately, membership of Emu has, if anything, reduced pressure on governments to undertake reforms.

Italy and Germany illustrate this paradox most starkly. Freed from the risk of currency crisis and higher debt service costs, Italy has done little to strengthen its public finances, ùmake its labour market more flexible* or boost competition. The result has been a steep decline in productivity growth, higher than average inflation and a loss of competitiveness.

Italy is not solely to blame for its predicament.

German real wages grew by an average of just 0.3 per cent a year from 1999 to 2005, massively boosting the country's competitiveness and exports but depressing domestic consumption. The result has been a dramatic rise in Germany's trade and current account surpluses and a steady increase in the proportion of these surpluses accounted for by trade with other eurozone economies. Within Emu, Germany has been able to rely on exports for economic stimulus, reducing pressure on the German authorities to address the poor performance of its domestic economy.

Germany's dependence on wage restraint and exports leaves other eurozone members in an invidious position. If they try to regain competitiveness by depressing wage growth, Germany's economy will weaken, prompting tighter wage restraint in the country. This would further depress German domestic demand and, with it, demand for imports from other eurozone economies. While investment in Germany has strengthened this year, a lasting recovery in domestic demand is not possible without stronger wage growth.

If one eurozone economy reforms and is competitive, that works at the expense of others. If others do the same, no one will be competitive.

My take is: labor market reform = beggar-thy-neighbor policy, i.e. it works only at the expense of those that do not do it, and it's detrimental to all if they all do it.

Their take, of course is:

Eurozone governments must convince voters that the reforms needed to ensure the success of the euro are also those that will boost economic growth and safeguard public services and welfare states. It is not too late to ensure the long-term success of the euro.

I don't suppose it ever occurred to them to consider social cohesion as a desirable objective of public policy in its own right.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman