This is the first of a three-part look at the European debt crisis.



) -- The need for lower real wages in Spain and in Greece, the resolve in Germany and France to save the euro, and the difference between the economies of Italy and Greece -- these are just some aspect of the European debt crisis that experts say need to be grasped by investors in the U.S.

The longer the crisis runs its course -- now ongoing for two years -- the more investors get bombaded with increasingly complex details.


asked economists to help investors by writing back their thoughts on this question:

The Street: What part of the debt crisis do you think is most misunderstood by investors?

Francisco Torralba, economist with Morningstar Investment Management

: One thing that I find missing from most reports is that fiscal union alone (or a rescue package) are not sufficient to keep the union together in the long run. The eurozone needs structural reforms that allow the union to rebalance their external positions. The northern bloc needs to shrink its current account balance, whereas the peripheral nations do exactly the opposite. That should be achieved through fiscal and structural reforms, that increase consumption, reduce saving, and reduce the cost advantage in production of Germany, Netherlands, Austria, and Finland.

In the meantime, the Mediterranean members (Spain, Italy, Portugal, Greece, and France) need to implement changes that restore their competitiveness within the eurozone, through increased productivity, lower real wages and more flexible labor markets. A fiscal union without economic reform along those lines risks turning the Mediterranean members into the Sicily of the eurozone: forever uncompetitive, underemployed, and lacking the incentives to catch up with the north.

Mark Vitner, senior economist with Wells Fargo

: I think what is most misunderstood about the European debt crisis is just how much exposure the European banks have and how levered up they are.

Darren Williams, senior economist with Alliance Bernstein

: The aspect of the sovereign debt crisis that has been least understood, especially outside Europe, is the political dimension of the crisis. As the crowning achievement of the postwar European settlement, countries like Germany and France were never going to give up on the euro without a fight. Investors have come to appreciate this more over the last two years, but might still be underestimating the resolve.

Raj Badiani, London-based economist with IHS Global Insight

: The biggest systematic error is grouping Italy and Spain with the likes of the actual peripherals of Ireland, Greece and Portugal. Both Spain and Italy enjoy a far more diversified and value-added economies than the likes of Portugal, Greece and Ireland, and are better able to absorb rising debt funding costs.

One more point, I think U.S. investors cannot grasp why the European Central Bank is not prepared to step in and act as a lender of last resort to the likes of Italy and Spain. I think this frustration with ECB (with its inaction interpreted as a vote of no confidence in the Spanish and Italian economies) is driving up the risk premiums of holding Spanish or Italian government bonds.

Carsten Brzeski, Belgium-based economist with ING

: The part that is in my view most misunderstood by investors is the functioning of the EU and the monetary union. It is hard to understand that we have 17 governments plus 17 national parliaments plus the European Commission plus the ECB deciding on the crisis management. This construction simply makes that decisions cannot be taken quickly and that finding a consensus is very difficult. Just think of the US crisis management. When the US decided on the TARP programme, you only had two persons making the decisions. In the Eurozone it is at least two times 17.

-- Written by Chao Deng in New York