The forgotten crisis

However, the euro's crisis was not merely a financial one which can be solved by cheap money and plenty of it. It was also a fundamental economic one. And this hasn't gone away.

The strongest evidence that tensions have eased does not lie in government borrowing. In Spain, Portugal and Italy the OECD expects government borrowing as a share of GDP to be higher this year than it was in 2008. This is because tighter fiscal policy has been offset by falling tax revenues and increased welfare spending caused by the recession.

Instead, the best reason for optimism is that current account deficits in southern Europe have fallen markedly. This is good news in two ways. First, it means these countries are less dependent upon overseas borrowing than they were a few years ago. Sure, governments are still borrowing, but private sectors are now net lenders, not net borrowers. Secondly, a current account balance - by definition - means that domestic saving equals domestic investment. Subject to a few caveats, this implies that domestic banks are seeing their deposits grow at roughly the same rate as their loans, which means their reliance upon skittish external funding is not rising, as it did before the crisis. In this sense, then, the region is healing.

But at a price. Southern Europe's current account deficits haven't fallen because the North's surpluses have fallen. The burden of adjustment has been borne entirely by the South - in the form of lower domestic demand and much higher unemployment. In Italy, the jobless rate has risen from 6.7 per cent of the workforce in 2008 to 12.2 per cent now; in Spain, it's jumped from 11.3 to 26.2 per cent; and in Greece from 7.7 to 27.9 per cent. The financial crisis might have faded - but at the expense of an enormous human crisis.

The question, therefore, remains: will it be possible to combine economic growth with stable debt?

To see the problem, we need some maths. To stabilise ratios of government debt to GDP, a country needs a combination of three things: a primary surplus - that is, an excess of tax revenues over spending before interest payments; a lowish initial debt-GDP ratio; and higher trend GDP growth than real interest rates. The problem is that even though southern European governments are running primary surpluses, the other two terms of this equation - what Llewellyn Consulting's Bimal Dharmasena calls the "snowball" effect - are less friendly.

Take Portugal as an example. The OECD expects it to have a debt-GDP ratio of 147 per cent next year. This means that if real interest rates are 5 per cent and trend GDP growth 3 per cent, then it needs a primary surplus of 2.8 per cent of GDP merely to stabilise its debt-GDP ratio. This is a slightly bigger surplus than the OECD expects next year. In other words, unless interest rates fall further or trend growth is high, the country is condemned to years of austerity. The maths for Italy and Greece are similarly bad, though Spain is better placed.

Sadly, there's little reason to hope for lower interest rates. Quite the opposite. It's possible that in the longer-run stronger global economic growth, a reversal of US quantitative easing and decline in the global savings glut will raise global real yields. Southern Europe's best hope of avoiding the "snowball" effect lies instead with the possibility that growth will eventually pick up.

In this context, mass unemployment is - from one perspective - part of the solution. This is doing what basic economics predicts; its' driving down wage costs. David Owen at Jefferies Fixed Income points out that since 2009 labour costs (which include taxes as well as wages) have fallen from €17.1 (£14.36) to €13.6 per hour in Greece and from €12.6 to €11.5 per hour in Portugal, whilst they have risen from €28.6 to €31.3 in Germany. In theory, these lower costs should improve the region's competitiveness and so boost net exports and inward investment, which in turn means faster long-term growth and hence healthy stabilisation or reduction in government debt.

And there are signs of this happening. The OECD expects net exports to add 2.7 percentage points to Greek GDP next year; 1.6 percentage points to Portuguese; and two percentage points to Spain's. However, there are also three reasons for scepticism:

■ Lower wages depress domestic demand and hence growth. As the great Polish economist Michal Kalecki wrote 80 years ago, "a reduction of wages does not constitute a way out of depression."

■ One channel through which wage cuts might boost long-term growth - by attracting inward direct investment - isn't really working yet. Yes, Greece and Portugal got more inward direct investment last year than they did on average during the boom years of 2003-07. But it only accounts for less than 1 per cent of Greek GDP and less than 2.5 per cent of Portugal's.

■ The institutions which would favour growth are absent. Although the European Stability Mechanism offers to help highly-indebted euro area members, it does so on the basis of "strict conditionality" - that is, by imposing austerity. This is no way to achieve growth. What's missing, says Luigi Guiso of the Einaudi Institute for Economics and Finance, is a fiscal union which would offer transfers from North to South on less onerous terms.

In this sense, the euro area's crisis hasn't gone away. The question of whether the South can achieve both economic growth and debt stability is still an open one.

This doesn't mean the euro must break up; reverting to national currencies would bring other problems such as huge rises in the cost of living for exiting nations and losses upon their external creditors. Instead, the point is rather that the crisis hasn't been solved so much as forgotten. And things that have been forgotten have a nasty tendency to suddenly and unpredictably become remembered.