There have been many other things that Europe has got wrong, but the overarching one is monetary union. From this original sin flows so many of our current difficulties. We know this to be true because countries in the EU but outside the single currency, such as Britain and Sweden, have fared much better than those in it.

So how come the euro hasn’t already collapsed under the weight of its own contradictions? And with populist, nationalistic insurgency in the ascendant across western economies, are we finally approaching the end game?

The euro is virtually unique in the history of monetary economics in being a currency without a government. Rather it is a shared, or common currency, in which each member notionally has some sort of a say. Europe’s founding fathers knew that monetary union couldn’t be made to work without a high degree of accompanying fiscal and political union, but cynically regarded it as a means of achieving that end. A United States of Europe would be forged in crisis, they figured, driving through the goal of political union against the centuries old instincts of Europe’s many tribes.

And in theory it could indeed be made to work. But in a confederation of proud nation states which finds it virtually impossible to agree even common deposit insurance, let alone a proper banking or fiscal union, it seems ever less likely.

No monetary union can last for long without a unified system of deposit insurance. It would be unthinkable, for instance, for London to refuse to participate in  deposit insurance for the country as a whole because there is a bank in Yorkshire which it fears might go bankrupt. 

Yet that’s precisely what happens in the eurozone; Germany refuses common deposit insurance with Italy because it fears being left on the hook for essentially insolvent banks such as Monte Dei Paschi Di Siena. Similarly, it would be unthinkable for the citizens of Edinburgh to be made wholly responsible in extremis for bailing out the whole of Royal Bank of Scotland. Fiscally, it would break them beyond redemption. But that's essentially how it works in Europe.

The eurozone pretends to be a fully fledged monetary union while behaving as if it were still a collection of siloed nation states. 

David Fuller's view

In financial terms, EU officials are likely to be the last to accept that they are on the wrong side of a bad trade.  Too much uncertainty and anger are being felt right now.  Also, all those unelected and pampered EU bureaucrats in Brussels will prioritise keeping the EU show on the road, whatever the cost.

It is populist public uprisings, such as Beppe Grillo’s Five Star Movement, which are more likely to hasten a breakup of the Eurozone.  That may sound like a disaster.  It may be somewhat tumultuous but I think it should be viewed as a rescue from a disaster.  If that is the prevailing sentiment, EU stock markets will benefit.  The DJ Euro STOXX 50 Index has had a good week, breaking above lateral resistance since May.  A break beneath 2900 would be necessary to seriously question a further recovery over the medium term.    

Here is a PDF of Jeremy Warner’s article.