The Euro was meant to be a lubricant for inner-European trade. A Europe divided along currency lines, supporters of the project argued, was hopelessly inadequate to compete with the big players of the modern global economy. At the outset, the argument seemed plausible. Other things equal, a removal of exchange rate risks and other currency-related transaction costs should have the same trade-boosting effect as the removal of a tariff or, for that matter, a physical obstacle.
But other things are never equal. The Euro itself has changed many other economic fundamentals, in ways which hinder economic integration rather than facilitating it.
The single currency has supplied the Mediterranean economies with huge volumes of cheap credit. Since most of this influx has been channelled into short-lived consumption or construction booms rather than productive investment, the pre-existing productivity gap between Northern and Southern Europe has not narrowed. Meanwhile, the influx has led to pronounced wage and price appreciations in the Southern member states relative to Northern levels. This can be seen in the development of labour unit costs, i.e. labour costs adjusted for productivity changes, for the economies as a whole. Since 1995, unit labour costs in have increas