By Patrick Artus

The eurozone crisis can be interpreted in different ways. Some believe the main culprit is a lax fiscal policy among a number of countries, in particular Spain, Greece, Portugal and Italy.

Others believe the crisis is primarily due to the household over-indebtedness, real estate bubble and banking crisis it has triggered in Spain, Ireland and Greece.

Some also claim that the European crisis is a result of the loss of competitiveness of some countries, where wage costs have increased too fast relative to Germany, and where, accordingly, industry has lost market share and foreign trade has deteriorated. This theory is used to explain the situation of Spain, Greece, Italy, France and Portugal.

If the eurozone crisis was simply due to one or several of these causes, it would not be that difficult to solve it.

The various countries would have to switch to more reasonable fiscal policies, the European Central Bank and the banking regulators would have to prevent excessive indebtedness, and wage restraint, like in Germany from 2001 to 2006, would restore the competitiveness of the countries where it has deteriorated.

These interpretations of the eurozone crisis actually emphasise the errors made in terms of economic policy and management in the zone: absence of financial and budgetary rules and the risk of excessive indebtedness, and pay talks that do not take into account a sufficient competitiveness constraint.

Unfortunately, the eurozone crisis is not due only to economic policy errors, but also to the fact that the institutions are not adapted to the real economic situation of the eurozone countries, a situation that would persist even if the right economic policies were implemented.

The eurozone countries are extremely heterogeneous, as they have adopted different productive specializations. Some countries have specialized in industry.

This is the case with Germany in particular, but also with Italy; others have deindustrialized and specialized in non-exporting domestic services: retailing, construction and consumer services.

This is the case for example with Spain, Greece, Portugal and France.

The first group of countries does not have any foreign trade problem, thanks to the weight of industry: Germany has an external surplus in manufactured products of 250 billion euros per year, while Italy has a surplus of 100 billion euros.

The deindustrialized countries, on the contrary, have structural external deficits despite the contribution from exportable services, such as finance and tourism: the current-account deficit amounts to 10 percent of gross domestic product in Greece, 7 percent in Portugal, and 3 percent in Spain and France, and is no longer declining.

This productive specialization is completely rational and efficient. The countries that have a large skilled labor force, abundant productive capital and a high technological level specialize in upmarket industry, the others in domestic services.

The heterogeneity of the eurozone, due to productive specialization, is therefore inevitable and logical.

However, the eurozone is not a currency area with federalism. Federalism would involve government transfer payments from the surplus countries to deficit countries that would cover their deficits — but these government transfer payments are nonexistent.

As a result, all eurozone countries have to wipe out their external deficits in the medium term, as they cannot possibly accumulate external debt forever.

Now, the deindustrialized countries, which are specialized in non-exportable services, are unable to eliminate their external deficit, unless they take measures leading to significant impoverishment of their population in order to drive down domestic demand and imports.

This is where we find the fundamental and institutional source of the eurozone crisis.

If heterogeneous countries, some of which have external deficits while others have external surpluses, want to have the same currency, the currency area they are members of must either accept federalism, such as compensatory flows of public money from surplus countries to deficit countries; or there must be a drastic downward adjustment of purchasing power in the latter.

This is the adjustment we are seeing currently in Spain, Greece and Portugal, given that there is no federalism in the eurozone, and has led to recessions in these countries and a huge rise in the unemployment rate, which has reached 25 percent in Spain, 21 percent in Greece and 16 percent in Portugal, and which is set to increase further.