Here is a long and generally brilliant analysis of the Eurozone’s predicament by Edward Hugh.

I especially like the way he explains deftly the hard realities and policy paradoxes we all now face, in one hard-hitting paragraph after another:

It is not simply a question of “closet” (or open) eurosceptics suddenly reappearing, but of the monetary union repeatedly showing fault lines exactly where many of those much berated macroeconomists had expected they might appear…

… at the heart of the monetary union’s current problems lie the huge imbalances which have been generated between the economic “surplus” countries in the core, and the external deficit ones on the periphery. Europe’s leaders have long avoided biting the bullet, and indeed could be considered to be in deep denial, over the significance of this issue…

With the arrival of the Italian elephant onto the centre stage at a stroke this argument has become as outdated as the institutional structure which lay behind it, since few of core Europe’s leaders are really willing to accept the responsibility for giving full and lasting guarantees for the country, quite simply because it is not just one more state in a fully integrated union, but a sovereign nation with all that that implies…

One of the curious anomalies about how the debate is currently being framed is the way in which banks and money funds who have invested in Europe’s periphery are being told that it is only right they should now assume some part of the anticipated debt restructuring burden due to their earlier policies of “irresponsible lending”, while these very same investors are also being urged to purchase new issues of just this very debt, on the argument that risk is exaggerated since the countries concerned have essentially sound economies, and are only suffering from short term liquidity and balance of payment type problems…

Banks have some responsibility to their clients (Nice – Ed) , and will not normally knowingly take decisions which will lose money for them. So it is only rational for them to try to “lighten up” their positions on some of Europe’s weaker sovereigns. What isn’t credible is for political leaders to at one and the same time tell the banks that they are lending irresponsibly and urge them to purchase debt which may well end up being restructured…

Which is why the Italian government is in a huge bind.It doesn’t have a debt flow problem, it has a debt stock problem, and as the risk premium charged on Italian debt rises and rises, and as the growth outcomes fail to meet the often optimistic targets, then the snowball of debt steadily slides its way down the mountain side with little the government can do to stop it growing as it moves. Like some modern Sisyphus, they are condemned to struggle with a monumental task where advance seems well nigh impossible…

His answer? The best chance for some sort of orderly outcome is to divide the Eurozone into two new currencies (Euro 1 – based on the deep logic of the old Hanseatic League which did well for 402 years! – and Euro 2), letting those countries which need a devaluation boost join Euro 2. If Germany heads Euro 1 and France Euro 2, the Franco-German axis can have a fine new job.

The great advantage of such a move would be that two of the major burdens under which the monetary union is labouring – the lack of price competitiveness on the periphery and the lack of cultural consensus between the participants – would be resolved at a stroke…

Read the whole thing and then give it a standing ovation.

As I wrote in June:

is not the European Union as presently constituted Too Big to Fail – and thereby doomed to Fail in the not too distant future?

The whole project is now exposed as a dangerous folie de grandeur.

Look. What do we Europeans basically want? To get richer, live nicely and not fight.

There is no reason why this should not be achieved through a network of several smaller regional European Unions with customised levels of integration and mutually reinforcing basic trading and security relationships. This arrangement would also make further enlargement much easier – Turkey might become the core of a new Regional Union.

All the expensive and annoying central bureaucracy could be scaled back or even abolished – farewell, European Parliament. Legitimacy and public accountability within each Regional Union would soar, as the governing arrangements would be much less remote.

Above all such a scheme would not be brittle, subject to horrible institutional contortions as one sprawling Union tries to accommodate quite different needs, policies and cultures.

Is someone in Whitehall planning a blueprint for how this would work?

Hullo?

Hullo..?