Capital markets are banking on a single currency. Despite the fact that Italy has a debt level twice Germany's, Italian bond yield spreads have shrunk to just one percentage point over Bunds. Assuming that the maths of the Maastricht convergence criteria adds up, what does a single currency imply for European equity markets? It means that corporate profits will be determined by productivity rather than currency. It means that equities will benefit from the higher domestic funds flows. It means that valuations will rise because of enhanced growth rates and lower capital costs.
Rates of economic and earnings growth will diverge. Europe has been a haven of debauchery. Soft-currency culprits such as Italy and Sweden have persistently bailed out uncompetitive costs of production through inflation and devaluation. Unit labour cost convergence has entirely been a case of lower currencies offsetting higher wages.
Maastricht makes this debauchery difficult. Its criteria enshrine the capitalist ethic of sound money. Its single euro removes the individual option of repricing via the currency. This is a disaster unless Europe can restructure its labour and other over-regulated supply-side factors. An unemployment rate of 11% and an output gap of 2% are testimony to the EU's uncompetitiveness.