The Euro Zone's German Crisis

"When it comes to productivity, Germany has pulled away from the rest of the eurozone, writes Alan Blinder, professor of economics and public affairs at Princeton University and former vice chairman of the Federal Reserve. Partly because of thorough-going labor-market reforms in the last decade, Germany has achieved vastly higher productivity growth than its euro partners. Since 2000, German unit labor costs have risen about 20 to 30 percent less than unit labor costs in the other euro countries. That gap has left Germany with a large intra-Europe trade surplus while most other countries run deficits.

"If we were talking about China, at this point we would accuse the Chinese of manipulating their currency to gain an "unfair" trade advantage. But, of course, Germany has not manipulated anything. It has acquired a seriously undervalued currency by locking into fixed exchange rates with Greece, Spain, Italy, and the others.

"There are three ways for the other countries to close the gap with Germany: first, Germany can volunteer for higher inflation than its euro partners by, for example, implementing a large fiscal stimulus or ending its wage restraint.

"Second, the other countries can engineer German-like productivity miracles through structural reforms while Germany, relatively speaking, stands still.

"Third, the other countries can experience deflation, meaning a prolonged decline in both wages and prices, which is incredibly difficult and painful - and generally happens only in protracted recessions. Sadly, this may be the most likely way out." Read more in the WSJ. (Thanks, Tom)