Events are testing the eurozone yet again. The latest shock comes from Italy, where Matteo Renzi’s comprehensive defeat in the constitutional referendum has caused his resignation. Italy, which has the eurozone’s third-largest economy, is an important country. Mr Renzi’s departure may not prove a decisive event. But, so long as the eurozone fails to deliver widely shared prosperity, it will be vulnerable to political and economic shocks. Complacency is a grave error.

Things are at least improving. Eurozone real gross domestic product expanded by 5.5 per cent between the first quarter of 2013 and the third quarter of 2016. Unemployment fell from a peak of 12 .1 per cent in June 2013 to 9.8 per cent in October 2016. Thus growth is running above potential. Yet this improvement has not offset the damage done by the financial crisis of 2008 and the eurozone crisis of 2010-12. In the third quarter of 2016, the eurozone’s aggregate real GDP was a mere 1.8 per cent higher than in the first quarter of 2008. Remarkably, real domestic demand in the eurozone was 1.1 per cent lower in the second quarter of 2016 than it had been in the first quarter of 2008. This extreme weakness of demand should not have happened. It represents a huge failure. (See charts.)

A direct way of identifying that failure is in terms of nominal demand. In the second quarter of 2016, eurozone nominal demand was only 6.9 per cent higher than in the first quarter of 2008. So what should it have been? Assume the trend rate of real growth is 1 per cent, while the inflation target is close to 2 per cent. Then nominal demand ought to grow at about 3 per cent a year. If policymakers had achieved that, nominal demand would have risen by about 28 per cent between the first quarter of 2008 and the second quarter of 2016. That must be too much to ask. But US nominal demand rose by 23 per cent over this period. Moreover, the weakness of demand also had a strong downward effect on inflation. Year-on-year core inflation has not exceeded 2 per cent since January 2009 and has averaged just 1.2 per cent since that date.