When the euro was established in 1999, prices were translated from the mark, franc and other currencies into euro at prevailing exchange rates. (Greece joined the eurozone in 2001, giving up the drachma.)
National prices reflected differences in labor costs and efficiency across countries, but owing to a variety of social and demographic conditions, productivity has improved more rapidly in Germany and other northern countries. Making goods in Southern Europe became too expensive, and Greece and others could no longer export enough to pay for imports.
Without a single currency, the values of the drachma and other Mediterranean currencies would have fallen against the German mark to restore competitive balance.
But as it is now, Europe has few of the mechanisms that facilitate adjustment. In the U.S., which has a single currency across a wide range of competitive circumstances, a single language permits workers to go where the jobs are, whereas most Greeks and Italians are stuck where they are born. New Yorkers' taxes subsidize public works, health care and the like in Mississippi through the federal government in ways the European government cannot accomplish.
Germany uses its size and influence to resist changes in EU institutions that could alter fiscal arrangements.
Hence, the Greeks and other Southern Europeans were forced to borrow heavily from private lenders in the North -- mostly through their commercial banks -- to provide public services, health care and similar services that were hardly overly generous when measured by German standards.
All this kept German factories humming and German unemployment low.
When the financial crisis and meltdown of global banking made private borrowing no longer viable, Greece and other Southern European states were forced to seek loans directly from Germany and other Northern European governments.
Bailouts implemented by Germany through the European Central Bank, the International Monetary Fund and the European Commission required labor market reforms, cuts in wages and pensions, higher taxes and less government spending.
All to restore Greek competitiveness, growth and solvency -- and all have absolutely failed.
Starved for investment, Greek industry is now even less capable of exporting to pay for the imports of everyday items Greeks need. GDP is down 25%, unemployment is about 25%, and health care spending is down 40%.
When austerity began, Greece's sovereign debt was 110% of its GDP. Now it is 160%. The debt grows larger by the day and can never realistically be repaid.
That should hardly surprise German Chancellor Angela Merkel. Germany pursues many of the same policies that she wants Greece to jettison -- it just does those differently.
Many German workers belong to unions that negotiate pay and work rules through national contracts. As a result they enjoy the highest wages and the shortest work week among large industrialized countries.
When recession struck in 2008, German businesses were freer from legal restrictions than Greek employers to lay off workers. So, Berlin subsidized employers to reduce hours, share work and still pay nearly full wages. And Germans were hardly required to accept huge cuts in the quality and availability of health care.
If Greece and the others really straightened out their economies, Germany and other Northern European countries would lose a great number of jobs to Southern Europe and political clout within Europe.
The newly elected Greek government is quite correct to eschew austerity and seek reductions in what it owes Northern European governments. In making those loans, the latter chose to ignore key facts.
The single currency is punishing Southern Europe, and solving Mediterranean states' chronic financial problems will require moving some industry from the North to the South. More austerity will only bleed the patient further.
In the near term, spending more and taxing less will help the Greek economy recover. But unless the single currency is abandoned and the EU is run to benefit all its members, Greece and the other Mediterranean states can never prosper.
Peter Morici is an economist and professor at the University of Maryland and a national columnist. He tweets @pmorici1