It seems only yesterday that leading Japanese industrialists who had heavy (and very welcome) investments in the United Kingdom were calling for the pound to merge with the euro in one grand continental currency.

Now the tune has changed. It is recognized that keeping the pound outside the euro has saved Britain a lot of grief and given its exporters a significant advantage.

Free from the iron grip of a fixed euro exchange rate, the British have been able to take some of the strain caused by deep recession and soaring debt levels through currency adjustment and setting their own interest rates.

Other EU member states, caught inside the single currency, have not been so lucky. Countries like Greece — but also Italy, Spain Portugal — have all found themselves powerless to adjust exchange rates or interest rates. Their only escape route is through using one instrument — drastic budget cutting, so drastic that in the Greek case it is already provoking civil disorder.

For these countries it is as though a thief had been in their golf bag, removing every club except one, which then has to be desperately used, however unsuitable.

The Greek situation is grave, but the dilemmas it poses strike at the heart of the whole euro system. The basic problem is that while the euro’s monetary policy is controlled centrally, with a single interest rate applied throughout the whole euro zone, on a one-size-fits-all basis, the zone’s budgetary policies are set nationally within each member state.

If a euro-zone country overspends wildly then it can only avoid complete bankruptcy in one of three ways. Either it slashes spending and raises taxes (both politically agonizing), or it is bailed out by other EU members, or it leaves the euro zone and goes back to its own currency — in the Greek case, the drachma.

The leading architects and guardians of the euro zone, notably Germany and France, know that if Greece dropped out others such as Spain and Portugal would quickly follow, leading to the collapse of the whole euro project.

At the same time the Germans are resolutely opposed to any kind of bailout of their small but profligate fellow member. They deeply deplore the day Greeks were ever allowed to join the euro, which they apparently did by using dubious budget figures when they first applied, assisted, so it is said, by adroit bankers at Goldman Sachs.

The solution has thus been to put together short-term fudges. The latest one is to keep pressing the Greek government to tighten the budget discipline screws still further, while reassuring it that if and when disaster and national chaos follows, other euro members, together with the International Monetary Fund, will come riding to the rescue with guarantees and maybe actual loans.

Even if this keeps the lid on the crisis for few weeks, the fundamental problem remains: How can certain weaker euro-zone states be prevented from cavalier spending and borrowing without blowing up the whole fixed exchange rate euro system.

One predictable suggestion (from German Finance Minister Wolfgang Schauble) has been that perhaps the EU authorities should now extend control not just over monetary policy but also over the state budgets of every national government, using some kind of European central fund to help those countries in need. Tax and expenditure powers would be centralized in Brussels.

Europe would then at last become, like the United States of America: one country under one central government.

This idea has been greeted with horror all round. It would require a new EU Treaty when the last one, the Lisbon Treaty, has barely starting working (and is already causing bitter disputes and quarrels). It would take power even further away from the people. The Europe of nation states would be all but dead and buried.

Another suggestion is for the euro zone to shed all its weaker members and shrink back into something like the old Deutschemark zone.

Yet another strange line of argument, apparently favored by leading Financial Times columnists, is that countries like Germany, which have grown strong by competition, hard work and high savings, should now spend more, work less, abandon their maddening efficiency and instead drag their standards down to those of the weaker and less prudent member states, so enfeebling the whole euro zone.

The theory behind this warped line of thought is that the big export-surplus countries, like Germany, are somehow just as much to blame for the present crisis as the near bankrupt deficit countries like Greece. That such a view could be seriously advanced by supposedly reputable economic sources shows how some economists have simply lost their way and become detached from the real world.

The only sane way forward is for each country to perform to the best of its abilities, energies and talents. If that makes some countries richer, then let them invest their homegrown wealth around the world, as the great capital-generating engines of the past did so beneficially.

If that in turn makes it necessary to have flexible and variable exchange rates, and limit currency unions to a very small number of similar economies, then so be it. That would entail the euro zone returning to the more manageable hard core of richer central European economies from which it began. If present trends are any indication, that’s where the euro zone will end up.

David Howell is a former British Cabinet minister and former chairman of the Commons Foreign Affairs Committee. He is now a member of the House of Lords (howelld@parliament.uk www.lordhowell.com).

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