At the root of the Eurozone crisis was the building up of competitiveness gaps, current account imbalances and associated capital flows, toward the deficit countries, whose sudden stop kick- started the crisis. In this process the rise of the German surplus was the main driving force. After eight years, while the crisis countries have zeroed their deficits or transformed them into surpluses, the imbalance of Germany has kept increasing. Estimates from various sources point to an undervaluation of the real exchange rate of this country. In this paper it is argued that such undervaluation is the consequence of unadjusted German internal imbalances. Germany benefited from a biased technological improvement in the traded-goods sector that would have required a real appreciation to restore the internal and external equilibrium. Lacking the exchange rate, the real appreciation had to be achieved through an acceleration of German inflation compared to the other member countries. Yet labor wedge shocks, causing persistent wage moderation, turned off the adjustment mechanism and things went the opposite way. The distance of the German real exchange rate relative to an equilibrium value has enlarged even more in the last few years. The failure to correct this imbalance constitutes a persistent factor of economic and political fragility of the European Monetary Union.

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