"Internal devaluation is starting to correct Europe’s imbalances, albeit gradually, according to a monthly report from the European Central Bank. Germany is the long-term competitiveness champ, having reduced its costs by 14 percent since 1999, according to the central bank’s “harmonized competitiveness indicator.” But over the past year the biggest improvement, 7 percent, was recorded by Ireland.
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The great tragedy of Europe is that it’s ever so close to pulling itself together—but perhaps not close enough. International lenders are losing confidence in the ability of debtor nations to earn their way out of indebtedness. They’re demanding higher yields to compensate themselves for greater perceived risk. If they drive borrowing costs any higher, countries that might have made it back into good standing in the international community will be forced into a chaotic cycle of default and devaluation.
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And while Greece can’t push its wages much lower, Germany resists letting its labor costs drift much higher for fear of losing ground to tough rivals outside the euro region. Macpherson argues that for Germany, allowing more inflation in the core of the euro zone to right the competitiveness imbalance is “the least bad option.” Chancellor Angela Merkel and Bundesbank President Jens Weidmann don’t appear to agree with him."
http://www.businessweek.com/articles/2012-08-08/parts-of-europe-have-quietly-become-competitive#p1
