Finance and the Euro: Peace or Truce?

Spread, EFSF, LTRO – these are the battle cries of today's financial war being fought on the Continent. The conflict has been raging since the first battle around Greece in May 2010. On one side of the battlefront you have the large investment funds that drive global liquidity, which have gone to war to protect themselves against European debt; on the other side there are the eurozone governments fighting back. Hedge funds, like merchants in the Thirty Years' War, are busy doing business with both sides. Caught in the middle are the common people, who have a hard time grasping why all this is happening to them.
After violent battles and sudden reversals of fortune, with financial indicators rapidly advancing or retreating, the war is coming to an end, without a clear winner in sight. Institutional investors are bound to regain their confidence in European markets, since governments, pressed by emergency, have learnt how to organized their resources: the ECB is providing liquidity, the fiscal compact has been agreed upon, as well as the European Stability Mechanism (ESM). When the latter is fully in place, it's likely that hostilities will cease.
Will it be lasting peace? To answer, we must understand the nature of the crisis the led to conflict. Europe's woes are not fiscal: they are balance of payments problems. Spain and Ireland have always kept public finances in good order. Unlike France and Germany, they never violated the Maastricht Treaty. But all countries hit by the crisis, Italy included, exhibit a productivity deficit (i.e. slower productivity growth) with respect to Northern Europe. In the absence of compensating credit, this generates a structural current account deficit, which must be addressed sooner or later, in order to stave off bankruptcy. Since it's unlikely that Greece or Portugal will become more competitive than Germany in the short term, macroeconomic adjustment requires either devaluation of the real exchange rate or transfers from surplus to deficit countries. The former solution has proved socially unsustainable in a currency union. Since the nominal exchange rate is fixed, real devaluation entails unsustainable social pain, like the double-digit cut in prices and wage that's been imposed on Greeks.
Thus, an economic cannot do without fiscal solidarity. It remains to be seen whether such solidarity will be achieved either through a changed role of the ECB, in order to be allowed to buy debt directly, or an integrated interbanking market, or, as it is more transparent and to be hoped for, through ways of sharing the debt burden across all the eurozone by issuing eurobonds; or, finally, by using the Union's budget for territorial redistribution, as it happened with the US federal budget during the final years of the Great Depression.
But if the European house does not undergo major renovation, between governments and markets there won't be lasting peace, but, at best, a long truce.