The euro has to be a success if Europe is to flourish. Unfortunately, diverging trends in competitiveness within the eurozone threaten its stability. If they persist, a break-up of economic and monetary union cannot be ruled out, raising questions over the future of the single market – Europe’s most important force for improved economic performance.

Within a currency union, a country cannot devalue its currency to regain competitiveness but must alter the relative prices of its goods and labour. There is scant labour mobility between eurozone members and no sizeable central budget to even out performance differentials. If the euro is to succeed, members must have flexible labour markets so that real wages (nominal wages adjusted for inflation) can fall relative to other member states and workers can move rapidly from declining to fast-growing industries. Competition must be strong so that companies have to innovate and search for ways to boost productivity. The participating economies also need to be fully integrated so that trade and flows of capital prevent differences in inflation becoming entrenched. Lastly, public finances must be sound so that an economic downturn can be temporarily offset by stronger public spending.