The Euro

I forecast that this year the attention of the currency markets would focus on the eurozone and how it has. The single currency has lost 5% of its value against the dollar this year, which is not yet seven weeks old.

There are two aspects to this which merit attention. The first is, shall we say, the technical argument. The European model, with its regulated labour markets and strong welfare, tends to bounce along without changing much, which is what you want in good times but not when emerging from a serious recession. The lesser regulated American model, by contrast, if not roaring out of recession, is at least pulling strongly. The peripheral European economies are waiting for the German consumer to do something, but he is cautious and not spending. The euro will tend to fall against the dollar just for being the slower runner in the race.

The second aspect is a discussion of the very existence of the euro, and it is this which has made Greece, a minnow at 3% of Eurozone output, so important. A single currency among sovereign states means that monetary policy - the interest rate - is controlled in Frankfurt, but fiscal policy - government spending - is a matter for the individual nations. Greece, together with several others, have overspent. The 3% deficit limit is a joke when not even France and Germany can keep to it, so to a Mediterranean country this was simply carte blanche. Someone would bail them out eventually.

Romano Prodi once said that the first crisis the eurozone faced should be seen as an opportunity. What he meant was that they could seize the moment to complete the European unity project, and that means complete economic union. The guys at the centre now have this dilemma: if they try to complete monetary and fiscal union now - Frankfurt telling Athens how much it can spend on welfare next year, and Italy whether it can afford its bridge to Sicily - the members of the eurozone might see that as an attack on their independence (it would indeed be exactly that). But even then, with the olive belt agreeing to cede fiscal independence, there would loom the problem of the lack of competitiveness in these areas. They would continue to get steadily poorer relative to Germany and in five years they would have to be bailed out with massive regional spending. And no hard working German wants to be on the hook for that.

The other horn of the dilemma is that if they don't limit Mediterranean profligacy, the euro quite simply cannot survive. The poorer countries will collapse under the weight of their ever rising debt.

So the chaps in Frankfurt and Brussels are left hoping that Greece and the rest will cut their deficits willingly. But no one has any experience of cutting: since the war governments have got their fingers into more and more pies, not fewer; elections have always been about who would spend more, not less. Already Greece is on strike and they haven't even heard, much less felt, the half of what they are going to have to go through. Can the Greek government pull it off? Can they reduce people's living standards and benefits in order to stay in the currency union? Or would that make them unelectable?

It seems to me that Democracy has faced the project down. Papandreou now knows that the German electors won't allow Merkel to open her chequbook, but the Greek voters won't allow him to close his.

It is on this that the future of the euro depends. If it were me, I'd get ready to sling five of them out. But there again I would have addressed this problem ten years ago.