European imbalances and the debt crisis in Europe

The imbalances within the Euro-zone were the main reasons of the crisis that had led to the growing budget deficits in the Southern Europe resulting in the accumulation of unsustainable debt. The imbalances were caused by the declining competitiveness of the South vis-s-vis the North. The main causes of the declining competitiveness are the differences in unit labor costs invoked by different regulations concerning the labor markets in the Euro-zone countries and the diverging levels of productivity, which is liked with the different levels of technological advancement. The contributing factor is the institutional imperfections of the EMU, that did not allow the countries in Southern Europe to restore their competitiveness by traditional means without providing them with alternatives.