I WANT to follow up on one bit of yesterday's discussion on the euro crisis. I wrote:

Two things began happening in the euro zone in 2007. Growth in the number of euros spent every year began slowing, and the distribution of euro spending within the euro area began shifting back northward. The crisis of 2008-09 led to a short but nasty contraction in total euro spending. Then euro spending swung back to growth, but at a pace half that of the pre-crisis level and slowing. From roughly late 2011, the number of euros being spent around the periphery has been in decline. The picture is one in which there are many fewer euros floating around the euro area than markets expected a half decade ago, and the distribution of those euros is moving northward. Had the trend in Spanish nominal output growth from 1998 to 2006 continued thereafter, total spending would now be some 54% higher than it currently is. It seems reasonable to argue that the distributional shift needed to occur, given the actual productivity performance. The overall slowdown in euro spending growth, however, looks like an unnecessary and painful complication to adjustment.

A chart would make this wordmush easier to parse:

Ok, here we have year-on-year changes in nominal output. During the first decade of European Monetary Union, the Spanish economy was enjoying scorching income growth of almost 8% per year on average. (Spain is a stand-in for the periphery here; the Greek, Irish, and Portuguese experiences were similar.) That sort of growth is simply unsustainable within a currency union.* It represents, more or less, very rapid growth in the number of euros being spent each year. In the absence of a productivity boom, in which the value of goods and services produced each year grows in step with spending, nominal growth like this will manifest itself as inflation: rising wages, prices, and asset values. Because there is no exchange rate between Spain and its euro-zone trading partners, inflation translates into direct loss of competitiveness relative to other euro-area economies. The money in Spain will ultimately decide to go elsewhere, where it can be used to obtain more value.

There is, in other words, a sense in which structural factors play a role in the current euro crisis. Had Spain managed a better productivity performance, it would be in less trouble (probably, holding other things constant). If it could manage a big productivity boom now, it would have an easier time of things. Yet it's very important to note that low productivity growth alone does not cause crises. Low productivity growth does not cause high unemployment. There are lots of countries in the world with levels of per capita output well below Germany's and most of them are not facing major financial and economic crises.

So where do we get crisis in the euro area? Another factor in this mess is the highly incomplete institutional integration of the euro zone. Money flowing out of the periphery endangered peripheral banking systems. In America, when something like that happens it isn't deadly for the country's currency union because the FDIC is there to ensure that the national government, supported by the national central bank, is there to protect depositors and shield states from insolvency. And it is very, very easy for Americans to follow the money when it leaves for other parts of the country. In the euro zone, by contrast, every state government is responsible for its own banking system. That allowed for a "diabolical loop" to develop in which falling confidence in banks reinforced falling confidence in sovereigns which reinforced falling confidence in banks. And while "open borders" are the law of the land within the euro area, there are still substantial barriers to internal migration (professional qualifications often do not transfer, for instance).

There is certainly a sense in which institutional factors like those above have fanned the crisis. The diabolical loop nearly brought the house down before the ECB began throwing high-powered acronyms at the problem. And yet improving financial conditions and falling sovereign yields have not brought the periphery out of recession. Increasingly it is the political discord resulting from economic strain that is posing a threat to the euro area, and that's getting worse. Spanish per capital output is now smaller, relative to the German level, than it was in the late 1990s.

And so one has to turn to the importance of the path of the blue line in the chart above (and its relation to the black line). The Germans had a rough go of things early in the euro area's life, as they faced their own internal devaluation, complete with high unemployment. Yet overall growth in the euro area was decent at the time; there were plenty of booming neighbours around to buy German products and pay fat returns on German investments. That has not been the case over the past five years, during the span in which the periphery has attempted its own German turnaround. During that stretch total spending across the euro area has fallen dramatically below trend. The pace of growth is falling and is perilously close to outright contraction. Remarkably, spending growth in Germany is back to the levels it maintained during its internal devaluation.

Look at the gap between the Spanish line and the German line in the early 2000s. This is a bit crude, but suppose now that Spain needs to erase that gap, to basically run the early 2000s backward. And imagine that it must do so relative to the German line of the early 2000s. Well then Spain would be looking at close to a decade of negative nominal output growth. Greece has been at it for almost half a decade, and it is obviously in a full-on depression. Low productivity might not cause crises or soaring unemployment, but depressions are very good at doing so. The chart above does a pretty good job explaining most of the euro zone's troubles.

Even a much-improved institutional structure would struggle amid this dynamic. Certainly America hasn't dared to subject its union to this sort of pain. Nominal output in Michigan plunged between 2007 and 2009 but quickly rebounded (thanks in part to substantial support from Washington). Like most of the rest of America Michigan's nominal output remains below the pre-crisis trend, but it had at least regained the pre-crisis peak as of 2011. (Performance in the desert southwest, America's Spain, has been similar to that in Michigan.) Spanish nominal output, by contrast, never came close to returning to the pre-crisis peak and now looks like heading for new post-2007 lows.

All of which is to say: there are lots and lots of economic problems in the euro area. But the main reason the single currency is at risk is that the core, and the ECB, are subjecting the union to patterns of nominal growth it simply can't be expected to endure.

* Ok, technically it is sustainable, in a world in which the European Central Bank decides to target 8% nominal GDP growth in Spain. In this universe, it is not.