{S} o much for the convergence and generalized economic prosperity that the eurozone’s creation was supposed to produce.

Some 25 years after launching the euro, there has been continued divergence between the public finances and economic performances of the euro zone’s northern members and its southern periphery. While Germany and the other northern member countries have enjoyed prosperity and generally pursued responsible budget policies, income levels today in countries like Greece and Italy are practically unchanged from where they were some 15 years ago. Meanwhile, public-debt levels in the euro zone’s economic periphery have risen to record highs.

If recent public-sector developments in Germany and Italy are anything to go by, there is little prospect that the euro zone will meet its founders’ expectations anytime soon. Indeed, there is every reason to think that economic divergences will be exacerbated. That will raise new questions about the euro’s survivability once the European Central Bank (ECB) finally ends its bond-buying activities.

The euro zone’s founders fully understood that when each member country adopted the euro, it would lose its ability to set its own monetary policy to stabilize its economy. Instead, each member would be obliged to accept the interest rate that the ECB set for the entire euro zone. This made it essential that the member countries all followed responsible budget policies for the euro to work smoothly as a single currency, both as a method of bringing the economies of the different members into sync, and also to ensure that members of the currency union did not need to ask the rest of the euro zone for a bailout. 

As originally envisaged (and reflecting the demands, above all, of Germany), the euro zone contained no provisions allowing for rescues financed from within the currency union. This was designed to stop the historically less fiscally responsible members from free-riding off the lower interest rates that came with euro zone membership, and then asking for help when they got into trouble. But it did not work out, resulting in the euro zone debt crisis of 2009–12. To avoid taking the currency union into territory where one or more of its members might default, the euro zone (after adopting various ad hoc financing mechanisms and participating in a number of bailouts) now has institutionalized an emergency-funding regime. 

In an effort to ensure responsible budget policies, the euro zone adopted the so-called Maastricht criteria, which were meant to guide each country’s budget policy. Members were supposed to restrain their budget deficits to no more than 3 percent of GDP. They were also supposed to bring their public-debt levels down to 60 percent of GDP.

It would be an understatement to say that the Maastricht criteria have been observed in the breach. While the northern member countries like Austria, Finland, Germany, and the Netherlands have run generally responsible budget policies, the same cannot be said for Greece, Italy, Portugal, and Spain. In the run up to the 2010 euro zone sovereign-debt crisis, these latter countries all had budget deficits in excess of 3 percent of GDP and public-debt-to-GDP ratios exceeding 100 percent.

Since the euro zone’s debt crisis in 2009–12, debt levels in the euro zone’s periphery have continued to climb to record levels that will be difficult to sustain in an environment of high interest rates. At 145 percent of GDP, Italy’s public-debt level today is some 20 percent of GDP higher than it was at the time of the 2010 debt crisis. At the same time, debt-to-GDP levels in France, Portugal, and Spain are all close to a troubling 120 percent. 

The disparities between current budget policies in countries such as Germany and Italy make it highly improbable that the divergence between the public finances of the euro zone’s north and south will narrow anytime soon. Whereas Germany applies a debt-brake that keeps its budget broadly balanced, the Italian government continues to increase public spending that will keep the budget deficit at around 5 percent of GDP for as far as the eye can see. It ought to go without saying that the institutionalization of the emergency facilities described above, along with the money printing that we have seen in recent years, have not incentivized budgetary discipline in those countries where good housekeeping is yet to become a tradition. 

Up until last year, high public-debt levels were not of much concern when interest rates were low and when the ECB was buying massive amounts of bonds to support the euro zone economy. However, those days are long gone. In the wake of the recent inflation spike, the ECB has been forced to raise interest rates to their highest level since the euro’s launch to regain inflation control. For the same reason, it is about to finally end its bond-buying program. That will substantially increase the cost of rolling over the large amount of public debt that will come due next year.

All of this makes it all too likely that it is a question of when — and not if — we will have another round of the European sovereign-debt crisis. The existence of the emergency-fund arrangements mentioned above ought to mean that we can avoid the confusion that characterized the euro zone’s response to the problems that began to unfurl in 2009. However, they do nothing to address underlying budgetary problems that sooner or later will not be sustainable. We have to hope that central bankers are not caught out as badly by the next European debt crisis as they were in 2010.