Yet, it is not just the periphery that is adjusting. In good economic times, the eurozone worked, with money flowing from the centre to the periphery creating the booms that have since become busts.
Indeed, before the crisis started, both Ireland and Spain had stronger fiscal positions than Germany.
It was only during the bust that their budgets deteriorated. Now, in the bad times, the money that previously went to the periphery is attracted back to the eurozone core. This is adding to inflation in Germany. The Germans do not like this, but there is little they can immediately do. After all, if the ECB raises interest rates to curb inflation in Germany, this will make the economic situation on the periphery worse.
The third area of adjustment is equally worrying for Germany. Because of imbalances between economies across Europe, adjustments also have to take place via central banks. This is not a worry if you think the euro will survive, but it starts to become a concern if there is a risk of any country leaving the system, as there is now. Germany’s central bank, the Bundesbank, has the biggest exposure to others, currently about 550 billion euros (US$722.5 billion) and rising. No wonder there is concern in Frankfurt and Berlin.
There are several ways this could play out. The euro system has to change to survive, and this includes moving faster towards a single political union, where the core provides more help to the periphery.
Taxpayers in Germany and elsewhere fear this. Yet there is little doubt that Germany is one of the biggest beneficiaries of the euro, as its manufacturing base does not have to contend with an overvalued currency, as does Switzerland’s. However, in return for “more Europe”, countries like Germany will demand greater say over the policies being implemented in Spain, Portugal and other countries.
They may tolerate this to begin with, but if growth does not follow, and there is instead austerity and recession, anti-euro sentiment is likely to rise, as it has in Greece. So the remainder of this year is likely to see renewed uncertainty over the eurozone, as was the case last year.
Gerard Lyons is chief economist at Standard Chartered Bank.