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Saving Europe From Collapse

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- Governments may soon fall in France and Holland, and are quickly losing legitimacy elsewhere in Europe, because austerity programs and a common currency risk throwing the continent into an endless recession.

Europe's infamous labor laws, which make layoffs expensive and businesses reluctant to invest, have long impeded investment and productivity growth.

During the expansion of the 2000s, the competitive core -- Germany, other northern economies and important parts of France -- coped better and accomplished stronger productivity. Consequently, the euro became undervalued for those economies and overvalued for Mediterranean economies -- specifically, goods made in the north became bargain priced and those made in Club Med states too expensive.

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Southern economies suffered large trade deficits with the north and insufficient demand for what they make. Governments in Italy, Greece and Portugal borrowed feverishly to keep folks employed, finance early retirements, and provide inexpensive health care.

Even as northern Europe and the U.S. recovered, the sovereign debt carried by those governments alarmed investors and interest rates soared. Each was forced to accept bailouts from more solvent European governments, led by Germany, on the condition they accept draconian austerity and pledge allegiance to the common currency.

Certainly, Mediterranean states must trim government spending and reform labor markets, but to pay back what they owe, they must earn euros by growing their economies and exporting more than they import. Together, those require more gradual reductions in government spending and abandoning the euro; or their economies will endure years of high unemployment to push down wages and prices and make their economies competitive with the north.

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In the end, all this will not be enough and endless recession will result, as new investments dry up and existing capital -- both machines and workers' skills -- atrophy or leave. The collapse of the south is now threatening the vitality of the north, as Germany, Holland and others may fall into recession without customers further south for what they make.

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