Back when the Euro was launched, senior US economist Martin Feldstein annoyed a lot of people by warning that the Euro was likely to lead to dangerous new tensions in Europe and between the EU and USA.

Here is a flavour of the argument:

Since there is no major country in the world that does not have its own currency, abolishing national currencies is a major move toward abolishing European national states…

Reducing policy competition among the nations of Europe will therefore reduce the ability of European companies to compete in world markets. The result will be increased trade friction with the U.S. and other countries as Europe attempts to block American and other non-European products on the ground that they are made under "unfair conditions," i.e, in countries with lower tax rates and more flexible labor markets.

All this in turn will be a cause of European conflict rather than the increased harmony that the original proponents of a federal Europe wanted. Governments are already protesting the attempt to harmonize taxes. Future experience with cyclical unemployment and rising inflation will justifiably provoke angry politicians to blame domestic ills on the decisions made by the representatives of other European countries. The frustration over the inability to influence one’s own national economic affairs is likely to become an increasingly difficult problem within Europe.

Some of the gloomy Feldstein prognostications turned out to be wrong, at least as far as the following decade was concerned – inflation did not rise in the EU, and the Eurofederalist impule towards greater harmonisation trundled along quite nicely as the Euro-visionaries had planned. ‘Conflict’ was avoided both within the EU and across the Atlantic.

But all that happened during a period of impressive global economic growth. The real test is what happens now as things suddenly get a lot more difficult and uncertain and the ‘deep’ assumptions upon which huge systems are based fall to be challenged.

Feldstein remains pessimistic:

The one-size-fits-all monetary policy in the euro zone will leave Spain with a higher jobless rate than it would have with its own currency, he said. Some of these smaller countries may grow unhappy and frustrated, leading political leaders to consider withdrawing from the monetary union. Doing so would enable the country’s central bank to choose an easier monetary policy and enable the currency to adjust to a more competitive rate. How would other members of the euro zone respond? Feldstein asked.
And so it proves? Some people are getting cross:

"This is war: countries have to defend themselves," said David McWilliams, a former official at the Irish central bank.

"It is essential that we go to Europe and say we have a serious problem. We say, either we default or we pull out of Europe," he told RTE radio.

"If Ireland continues hurtling down this road, which is close to default, the whole of Europe will be badly affected. The credibility of the euro will be badly affected. Then Spain might default, Italy and Greece," he said…

Mr McWilliams said EMU was preventing Irish recovery. "The only way we can win this war is by becoming, once again, an export country. We can do what we are doing now, which is to reduce our wages, throw more people on the dole and suffer a long contraction. The other model is what the British are doing. Britain is letting sterling fall so that the problem becomes someone else’s. But we, of course, have ruled this out by our euro membership.

"We are paying twice for the euro: once on the exchange rate and once more on the interest rate," he said.

"By keeping with the current policy, the state is ensuring that Ireland turns itself into a large debt-repayment machine. Is this the sort of strategy to win wars? " he said.

And meanwhile this:

A great ring of EU states stretching from Eastern Europe down across Mare Nostrum to the Celtic fringe are either in a 1930s depression already or soon will be. Greece’s social fabric is unravelling before the pain begins, which bodes ill.

Each is a victim of ill-judged economic policies foisted upon them by elites in thrall to Europe’s monetary project – either in EMU or preparing to join – and each is trapped…

Don’t expect tremors before an earthquake – and there is no fault line of greater historic violence than the crunching plates where Latin Europe meets Teutonia.

Greece no longer dares sell long bonds to fund its debt. It sold €2.5bn last week at short rates, mostly 3-months and 6-months. This is a dangerous game. It stores up "roll-over risk" for later in the year. Hedge funds are circling.

Traders suspect that investors are dumping their Club Med and Irish debt immediately on the European Central Bank in "repo" actions.

In other words, the ECB is already providing a stealth bail-out for Europe’s governments – though secrecy veils all.

An EU debt union is being created, in breach of EU law. Liabilities are being shifted quietly on to German taxpayers. What happens when Germany’s hard-working citizens find out?

And this:

The euro was on the back foot against most major currencies after Spain’s AAA rating was downgraded to AA+ at Standard & Poor’s due to the country’s deteriorating public finances. Greece was also downgraded last week and Ireland has been warned by the ratings agency that it too faces a downgrade as economic conditions worsen.

“The eurozone has so many issues, and the single currency is plagued by the region’s internal divisions. Spain just got downgraded, Italy could be next, and we have a European Central Bank that refuses to acknowledge the extent of the risks facing the area,” said Geoffrey Yu.

Alarmist?

In today’s chaotic and uncertain financial plight, who knows?