You would think Europe has enough problems without trying to fight 700 years of economic history, but, well, you'd be wrong.
I'm only half-joking. Or maybe I'm not joking at all. I can't decide. That's because the euro, which, of course, is what we're talking about, really has forced countries to stop what they've been doing for decades, if not centuries, in an effort to turn them into mini-Germanys.
What do I mean by that? Well, it's all about labor costs. Germany has actually cut them since the start of the euro, and now it wants its fellow members to do the same. That's the easiest way for them to regain competitiveness, and, as a result, get their economies moving again — if you assume the common currency is going to be constructed the way it currently is for the foreseeable future. The euro, you see, doesn't have the escape valves a monetary union needs to be a well-functioning one. There isn't a shared budget to redistribute money from countries that are doing well to ones that aren't, nor is there a shared language that makes it easy to move from countries that aren't going well to ones that are. So that means the trade balance between, say, Germany and Italy matters in a way that the one between Massachusetts and Mississippi does not. In the euro zone, the bigger the trade deficit, the weaker the economy, and the less able it will be to afford a safety net for its people or its banks.
The only way out, if you play by the rules as they are, is for Italian workers to get German raises. Which is to say, none at all. Do that long enough, and eventually your wages will be low enough to undercut the competition. Good luck with that, though. Workers, after all, like getting paid more, and really don't like getting paid less. (Economists can even prove that last part!). That's especially true in countries where they're used to getting raises — countries like, well, Italy. As you can see below, its unit labor costs, which measure how much its workers are paid for how much they produce, have grown about six times faster than Germany's in national currency terms during the postwar period. This was the case both when it had the lira (clear) and the euro (grey).
And if you go even further back — as in, a lot further back — it's a surprisingly similar story. In "Empire of Cotton," historian Sven Beckert recounts that from the mid-1300s on:
The Italian industry faced another challenge: the rise of nimbler competitors north of the Alps, in the cities of southern Germany. They drew, like their Italian counterparts, on cotton from the Levant. But while Italian manufacturers faced high taxes, high wages, well-organized urban weavers, and guild restrictions, German producers enjoyed the advantage of the more tractable German countryside where they gained access to cheap labor. By the early fifteenth century, German manufacturers had used this cost difference not only to capture many of the Italian export markets ... but to make inroads even into the Italian market itself.
Now, this doesn't mean that Italians, by their nature, are generous with raises and Germans are stingy. It's certainly possible for them to hold down wages as much as their northern neighbors. They did between 1950 and 1970. What it means is that Italian institutions might have started out by giving workers more bargaining power, which then entrenched norms around wages, and, in turn, led to even more institutions that reinforced all this. Italy was able to make this work as long as it had its own currency it could devalue when it needed to, as it did plenty of times prior to 1999. But now that it has the euro, it has to enforce wage discipline if it wants to have a competitive economy.
There's no other way, at least as long as Germany won't let there be. In theory, German wages could rise to match those in Italy, France and Spain, or just meet them halfway. But it doesn't want to. From their perspective, why copy the countries that are foundering when you can make them copy you? Never mind that it's bad economics to make countries try to cut wages, which you have to fire people to do, rather than raise them yourself. Germany wants to have its cake, eat it, and sell you the rest before telling you that you need to do the same. Except it won't buy any from you.
Nobody said making Italy German would be easy. Then again, nobody said they wanted to, either.