The news from Europe lurches forward and backward, but the fundamentals are fundamentally the same. The euro is basically doomed. Here's a simple way to think about why.
For all the talk about bond yields and deficits, Europe really faces a trio of existential crises. First, southern Europe has a competitiveness problem. Second, it also has an unemployment problem. Third, Europe itself has an institution problem.
During the bubble days, credit poured into Europe's periphery. In Spain and Ireland, credit poured into real estate, creating a housing bubble. In Greece, credit fed a government bubble. In Italy and Portugal, it credit encouraged households to borrow more, creating a private debt bubble. In all of these countries, wages soared as credit created more demand. Meanwhile, German paychecks stayed mostly flat. Hello, uncompetitiveness.
The below chart courtesy of the European Trade Union Confederation shows how much German wages (blue) have grown compared to Greek (light blue), Italian (purple), Spanish (green), Irish (orange) and Austrian (red) wages, since the introduction of the euro.
The road back to competitiveness begins with southern European wages falling relative to German wages. Germans are terrified of inflation, so that leaves one option: southern European wages fall dramatically while German wages stay steady.