Editor's note: Blogger Edward Hugh has a growing online fan base for his views on Europe's economy, and his advice has been sought by the IMF. Now 61 and living in Spain, Hugh's thoughts on the region's economic problems are attracting attention worldwide.
(CNN) -- The future of the eurozone seems to be hanging in the balance at the moment, and with it the future of the global financial system.
Despite vigorous commitments from the EU to support those eurozone economies in difficulty and a program of sovereign bond purchases from the European Central Bank, markets remain decidedly nervous, and the cost of financing debt continues to rise.
As a result, the common currency continues to hover anxiously around the 120 to the U.S. dollar mark as investors fret and fret about how the proposed bailout package will apply in practice, and who the first customer will be.
Meanwhile Spain's banking system continues to have hard work financing its short-term liquidity needs, and July looks likely to be a long hot month given the volume of public and private debt that will need rolling over.
The key issue is how a group of economies who have manifestly failed to converge over the last decade are now going to straighten out their imbalances.
As Nobel Economist Paul Krugman continually points out, the problems being experienced on Europe's periphery in countries like Greece and Spain are not simply fiscal ones, they are about structural imbalances and lack of competitiveness, and raise questions which go to the heart of the functioning of the common currency.
In Spain's case, the position is even clearer than in the Greek one: Before the housing bubble burst there simply was no evident fiscal problem -- indeed the country was running a fiscal surplus. Spain's current fiscal problems have only arisen due to the attempt to solve a competitiveness problem, using fiscal stimulus as a means.
Evidently the present situation was not anticipated when the monetary union was set up, so it is hardly surprising that mechanisms to handle it didn't exist, and are having to be put in place on the fly.
It was hoped that monetary management could be carried out on the basis of a hybrid institutional structure (the ECB plus national fiscal policy, with "light" monitoring from the center via the Stability and Growth Pact,) and that no bailouts or closer political integration would be needed.
Again, it is now evident that this methodology simply doesn't work, but there is no road back.
The biggest challenge now facing the EU is thus one of its own making -- Europe's leaders need to be bold and resolute enough to convince markets that they understand what has gone wrong and will do what is needed.
That is to say they need to be resolute in implementing the institutional changes necessary to put the process of monetary union on a firmer and more sustainable footing.
Basically the central euro problem has always been the issue of trying to set up a monetary union without setting up a political one first.
For the euro to work you need consensus, and people need to feel European (like people in the U.S. feel themselves to be Americans). If this were the case, and we had a "no one gets left behind" spirit, then Europeans would be more prepared to share difficult burdens together.
But what we have are excessively strong and largely out-of-date national identities -- just look at the way Greeks and the Germans lose no opportunity to have a go at each another.
Do people in Michigan speak this way about people in Florida? Differing cultural attitudes are a significant part of the picture, and nowhere is this clearer than in the attitude to inflation.
In part the euro hasn't worked because while people in the south anticipated a high-inflation, high-interest-rate environment, people in Germany anticipated a low-inflation one. Now the French would like the Germans to accept a 4 percent inflation target, while the countries in the south have ongoing deflation.
This just isn't going to happen, and we need to be realistic about what we can and can't do.
At the present time there is a lot of speculation about whether or not the euro will break up completely. I think this concern is misplaced at this point.
What the zone needs to do is address the competitiveness issues, and return the struggling economies to growth. To do this they need to restore lost export opportunities with the core countries.
A weaker euro does help, but ironically it is more help to Germany than it is to Greece or Spain, since while Greece only exports something like 4 percent of GDP outside the euro area, and Spain something like 8 percent, in the German case the equivalent figure is more like 24 percent.
Unless the heavily indebted countries on Europe's periphery find their way back to growth, the debt problems will become unsustainable in two, three, five years' time.
One way of resolving this problem would be for the respective countries to carry out a substantial "internal devaluation" -- that is a systematic reduction in prices and wages -- but the citizens involved have shown little stomach for this, and neither the EU Commission nor the IMF are prepared to actively advocate it.
So we are left looking for "doable" alternatives. From a purely technical point of view it could be very constructive to have an organized exit by Germany, allowing the euro to drift downwards for a time, while growth returns to the periphery.
If a new German Mark was trading at around 140 to the dollar, while the euro was at 80 or 90, all the peripheral economies would be rapidly kick-started back to life.
And as the situation improved, then the gap would steadily close, as structural reforms were applied, and productivity gradually rose.
Germany would obviously loose out in terms of peripheral debt, but would gain at the sovereign end, since German government debt is, of course, denominated in euros.
What such a move would do is buy time, which is something which is badly needed right now, and not only here in Europe.
To put things another way, it isn't only Europe's economies that are in disorder at this point -- the high value of the dollar means the U.S. recovery is steadily grinding to a halt.
So, putting it bluntly, we could call the euro-slide story -- "how Greece screwed the U.S." It's time to find some solutions that work here, and as the IMF warns in its latest report on Spain, time is now of the essence.
The opinions expressed in this commentary are solely those of Edward Hugh.