TightWind is written by Kyle Baxter. Stay Hungry. Stay Foolish.

Austan Goolsbee:

Certainly the countries of Southern Europe must rein in excess. In the long run, however, even the deepest of cuts won’t suffice. Southern Europe needs to grow or it will never control its debt levels. But with the euro zone keeping Southern Europe uncompetitive, the region’s growth prospects will remain dismal.

Northern Europe has fueled its growth through exports. It has run huge trade imbalances, the most extreme of which with these same Southern European countries now in peril. Productivity rose dramatically compared to the South, but the currency did not.

Europe’s problem isn’t just debt. The problem is Northern and Southern European nations are very different economically. Germany’s workers are highly productive and their economy relies on exports as a result, while Southern nations are not productive and thus cannot use exports to grow their economy. If they were not a part of the euro, they could devalue their currency to make their exports less expensive (and more competitive), but they aren’t, so they can’t. Their only way is to increase productivity.