The focus on the European periphery is in terms of the debt overhang. Many observers see excessive lending by banks and the sovereign debt over-hang as the main cause of European woes. 

Yet in some ways, these problems reflect a deeper cause:  the lack of competitiveness. One of the key measures of competitiveness is unit labor costs. It is a function of wages, benefits and productivity. 

Prior to monetary union, many countries in Europe would from time-to-time alter their central rate in the Exchange Rate Mechanism in an attempt to boost competitiveness. Rather than constant minute prices changes, as under floating exchange rates, Europe had opted for a step function. During periods of stasis, the periphery, but France as well, would lose competitiveness, especially against Germany. A lower mid-point of the ERM band would be negotiated, and the process would continue. 

Monetary union blocks that path. The loss of competitiveness is masked by the accumulation of debt. The end of the global credit cycle in 2007-2008 warned of the limits of such a strategy, but many European officials were caught up in the schadenfreude over the US sub-prime mess to appreciate the storm headed its way. 

The risk of lending to some home buyers in the US was mispriced. In Europe, the risk of lending to some countries was mispriced. Spain's 10-year bond traded briefly through Germany. Greece sold 10-year bonds in November 2009 around 200 bp on top of Germany. 

This Great Graphic shows unit labor costs from a number of EMU members.  It is drawn from Eurostat data was recently posted in The Telegraph.   There are several observations to be shared. First, as the debt levels were rising in the early years of monetary union, the periphery was losing competitiveness as measured by the unit labor costs. Second, German unit labor costs trended lower from 2000 through the start of the global financial crisis. It is this divergence that became particularly problematic. The path to currency devaluation was blocked.