The explanation for this is simple. When a country gives up its monetary sovereignty, its banks effectively borrow in a foreign currency, making them exceptionally vulnerable to liquidity shocks, like that which sparked turmoil in the EU's banking system in 2010-2011. The government, unable to print money to bail out the banks or increase export competitiveness through currency devaluation, is left with only two options: default or deflation (austerity).

Austerity's underlying logic is that budget cuts, by reducing the debt burden and restoring confidence, ultimately enhance stability and support growth. But, when countries pursue austerity simultaneously with their main trading partners, overall demand plummets, causing all of their economies to contract and, in turn, increase their debt/GDP ratios.

But the problem with austerity in the eurozone is more fundamental: policymakers are attempting to address a sovereign-debt crisis, though the real problem is a banking crisis. With the EU's banking system triple the size and twice as leveraged as its US counterpart, and the ECB lacking genuine lender-of-last-resort authority, the sudden halt in capital flows to peripheral countries in 2009 created a liquidity-starved system that was too big to bail out.

As holders of euro-denominated assets recognized this situation, they turned to the ECB for insurance (which the ECB could not deliver under its previous president, Jean-Claude Trichet, whose leadership was defined by his commitment to maintaining price stability). Investors' subsequent efforts to "price in" the risk of a eurozone breakup - not the volume of sovereign debt - caused bond yields to spike.

But the financial market turmoil fueled a panic among eurozone leaders, leading them to misdiagnose the malady and prescribe the wrong medicine, which has served only to generate new symptoms. While Draghi's promise, embodied by the ECB's "outright monetary transactions" program - as well as its long-term refinancing operation and emergency liquidity assistance program - has bought time and lowered yields, the eurozone's banking crisis persists.

Eurozone leaders must recognize that spending cuts will do nothing to stabilize the balance sheets of core countries' banks that are overexposed to peripheral countries' sovereign debt.

Until the EU rejects austerity in favor of a growth-oriented approach, all signs of recovery will prove illusory.

The author is professor of International Political Economy at Brown University and has the book, Austerity: The History of a Dangerous Idea, to his credit.

Project Syndicate