Export growth is down sharply, turning negative vis à vis the eurozone s periphery.

Nonetheless, the German model does hold some useful lessons for the eurozone s embattled peripheral countries today.

That is why interest rate spreads in the eurozone periphery are widening again now.

But now it is permeating the eurozone s core. And in the US, even if President Barack Obama and the Republicans in Congress agree on a budget plan that avoids the looming fiscal cliff, spending cuts and tax increases will invariably lead to some drag on growth in 2013 at least 1 of GDP.

The creditors imposition of strict austerity on the periphery is perpetuating the eurozone s division between center and periphery.

This may seem extreme, but it simply recognizes the reality that much of the existing debt will not be paid back without new flows of official financing.

The peripheral countries external deficits are falling rapidly, thus diminishing the need for foreign financing.

This pressure on the peripheral countries to deflate their already stagnant economies is turning into the eurozone s greatest challenge.

Throughout the crisis, it has been widely assumed at least so far that the eurozone core would remain solid, and would continue to write the checks for the periphery s distressed governments and banks.

The Germans have been insisting on institutional change more centralized eurozone control over periphery banks and government budgets in exchange for expanded access to financing for the periphery.

The eurozone crisis will not be resolved until this internal imbalance is reduced to a sustainable level, which requires not only fiscal adjustment in the troubled peripheral economies, but also balance of payments adjustments across the eurozone as a whole.

Not surprisingly, increased emigration to the stronger eurozone countries (such as Germany) has been accompanied by higher outflows of financial capital.

Political risks in the eurozone s periphery include the collapse of Italy s government and a fresh election as a result of former Prime Minister Silvio Berlusconi s criminal conviction.

German officials now understand that, given extensive trade and financial links, a disorderly eurozone hurts not just the periphery but the core.

That, in turn, implies the need for a real exchange rate adjustment inside the eurozone, with peripheral countries production costs falling relative to those in the core.

Eurozone leaders must recognize that spending cuts will do nothing to stabilize the balance sheets of core country banks that are over exposed to peripheral countries sovereign debt.

First, the eurozone authorities misread the real causes of the debt crisis, which stemmed mainly from a growing competitiveness gap between the core and periphery countries.

Without external constraints, public and private expenditure grew precipitously in many countries on the eurozone periphery, while wages rose faster than productivity.

Moreover, balkanization of economic activity, banking systems, and public debt markets continues, as foreign investors flee the eurozone periphery and seek safety in the core.

If a gradual process of disintegration eventually makes a eurozone breakup unavoidable, the path chosen by Germany and the ECB large scale financing for the eurozone periphery would destroy the core central banks balance sheets.

But the eurozone s peripheral countries simply did not have a choice they had to reduce their deficits, because the foreign capital on which their economies were so dependent was no longer available.

Throughout the crisis, it has been widely assumed at least so far that the eurozone core would remain solid, and would continue to write the checks for the periphery s distressed governments and banks. That assumption appeared plausible.

Moreover, unemployment in the eurozone has skyrocketed to an average rate of roughly 12 , with more than 50 youth unemployment in the periphery countries implying a long term loss of talent and erosion of the tax base.

The dynamics of adjustment within the eurozone exacerbate the underlying imbalances Germany is becoming more competitive while the periphery remains uncompetitive.

How could a eurozone supervisor be based outside the eurozone?

As investors reduce their exposure to the eurozone periphery s sovereigns, banks, and corporations, both flow and stock imbalances will need to be financed.

Moreover, recession on the periphery is now spreading to the eurozone core, with French output contracting and even Germany stalling as growth in its two main export markets is either falling (the rest of the eurozone) or slowing (China and elsewhere in Asia).

That, in a nutshell, is the fundamental eurozone dilemma the periphery needs financing as it adjusts, while Germany, pointing to the post euro experience, says that it cannot trust countries to reform once they get the money.

Nonetheless, the eurozone periphery shows little sign of recovery GDP continues to shrink, owing to ongoing fiscal austerity, the euro s excessive strength, a severe credit crunch underpinned by banks shortage of capital, and depressed business and consumer confidence.

Meanwhile, not only is fiscal austerity pushing the eurozone periphery into economic free fall, but the loss of competitiveness there will persist as relief at the waning prospect of disorderly defaults strengthens the euro s value.

Labor mobility within a currency area represents a key adjustment mechanism to preserve the effectiveness of monetary policy against asymmetries in regional shocks in theory, workers from the eurozone s shrinking periphery should flow to the expanding core.

Scotching the Eurozone

The Eurozone s False Recovery

Poland s Eurozone Tests

A Survival Strategy for the Eurozone

Growing Up in the Eurozone

Judgment Day for the Eurozone

The Eurozone s Autumn Hangover

The Eurozone s Last Stand

A similar adjustment within the eurozone, assuming similar productivity performance, would require wages in the troubled peripheral countries to rise more slowly than in Germany for a number of years, thus restoring their competitiveness.

The Government the Eurozone Deserves

Demokratisasi di Eurozone

Signs of Life in the Eurozone

Optimizing the Eurozone

The Eurozone s Narrowing Window