Slowly, surely but inexorably the euro - the currency that never should have been - is building its own nemesis. Nobody can foresee accurately when that moment will come but one thing is certain and - as foreseen here - the EU will use the crash to further its own goals of complete federal integration. This is step one towards the fast coming one world currency.Here comes the crash of cash!

Ambrose Evans-Pritchard, one of the world's great reporters, explains this below. He says “A euro crisis would be the midwife of a full federal economic system.” Be warned!

TELEGRAPH Business News 10.5.08
Ambrose Evans-Pritchard
EMU is more unworkable than ever

To those loudly insisting all this week that Britain should have joined the euro ten years ago, I can only say: are you completely mad?

As travellers, we all love the euro. It made my life marginally easier as the Telegraph's Europe correspondent in Brussels, sparing me the toil of filling out separate expense forms in marks, lira, francs, escudos, and so on.

But let's be serious. A minor convenience is nothing set against the fate of nations. Currencies are formidable instruments of economic management, for good or ill. Every great financial crisis over the last century has been linked to a currency cock-up. It was the perverse workings of the fixed exchange Gold Standard that turned the US slump into a global depression in 1931. (See 'Fetters of Gold' by Berkeley’s Barry Eichengreen. A brilliant book.)

EMU is the modern Gold Standard, at least for those caught in its web. (Though Eichengreen, oddly, does not see it. He will.)

I would acknowledge that the European Central Bank came through the credit crisis less bloodied that the Bank of England, but only because Frankfurt engaged in a pre-emptive bail-out, on a huge scale, accepting mortgage debt as collateral - and moral hazard be damned. It had no choice.

Euroland cannot risk a Northern Rock or a Bear Stearns. To do so would risk the implosion of EMU itself, for there is no 'lender-of-last-resort' in this system, (as the IMF has warned). Who would undertake such a rescue? The ECB is forbidden to do so by EU law.
There is no EU Treasury, no Euro-Darling, no Euro-Paulson.

The mere suggestion that German taxpayers might have to fund a lifeboat for the Latin region is politically poisonous. Europe's authorities will go to great lengths to ensure that such a situation does not arise - though it will arise, soon enough, anyway.

Be that as it may, surely the last decade has shown once again - if such a demonstration were necessary - that Britain's rumbustious, credit-driven, Mid-Atlantic economy is incompatible with the economy of Greater "Carolingian" Germany (DE, NE, BE, LUX, O, DK, and France above the Loire).

The UK cycle is at least a year ahead. The trade and capital flows are more intertwined with the dollar zone. The UK sensitivity to interest rates is much higher (floating mortgage rates, vis fixed in Germany, etc).

If Britain had joined EMU, the country would now be facing an even more almighty smash-up than it is facing already. We would face a repeat of the 1992 ERM debacle, but at higher levels of debt and with no hope easy liberation by the likes of Saint George (Soros).

Lest we forget, eurozone interest rates fell to 2pc after the dotcom bust and stayed there as late as December 2005, to help Germany recover from perma-slump. (UK rates were 4.5pc at the time, and not nearly high enough to check credit growth - as we now know).

Sir Eddie George, the former Governor of the Bank of England, says he can scarcely bear to think what would have happened to British house prices with rates anywhere near 2pc. As it is, UK household debt levels have reached a world-beating 103pc of GDP. Home equity withdrawal - that piggy bank for holidays, and over-powered cars - hit 4pc of GDP last year.

Think a step further. Once the post-bubble bust had begun under EMU, Britain would have been almost powerless to take countervailing action. Monetary policy would have tightened into the downturn - as it has been for Spain and Ireland over the last eight months. (Euribor lending rates have actually risen 85 basis points since the credit crunch began).

Britain would have faced a surging currency at exactly the wrong time. To those pro-euro readers who see the crashing pound as some sort of indictment of our independent monetary regime, I reply Hallelujah. A crashing pound is what we need, just as we needed it after the ERM liberation in 1992. (in other circumstances, of course, a devaluation might be a problem, but we are not in other circumstances).

As Neil Mellor from the Bank of New York Mellon points out, the pound has been perfectly hedged in this cycle. Sterling has fallen hard against the euro, giving a shot in the arm to British manufacturers (yes, they still exist, 13pc of GDP) who rely heavily on Europe’s markets: yet it remains overvalued against the dollar, softening the effect of oil, metal, and commodity inflation.

The shock absorber is working. The Bank of England has already cut rates three times.

It is true that Britain could in theory have shaken up its economic, commercial, and legal culture enough to make it half way compatible with Carolingian practice - although the Spanish, Italians, Irish, and others have not done so inside EMU, and no British government has ever suggested doing any such thing.

But one has to ask: what are the vast benefits to be gained from EMU membership that justify giving up control over the key levers of economic policy and ramming through a cultural revolution?

The calculus for a core-Europe country is different, of course. Who in Flanders pines for the late Franc Belge? Who in Brabant mourns the Guilder? (actually quite few, I have discovered). But the calculus is not entirely different.

For all the triumphalism we saw yesterday as Brussels saluted the magnificent success of EMU on its tenth 'birthday', the experiment is slowly coming apart at the seams. I stress "slowly", because foolish currency ventures take a very long time to inflict their damage.

The eurosceptics - by that I mean the serious critics - have been largely vindicated in their warnings. The malign effects of premature monetary union are unfolding more or less as they predicted. The elites prattle on. They always do. The happy chatter reminds me of the collective loss of judgement that afflicted the US and world credit markets in the last phase of the Greenspan debacle. You could see that the US economy was being driven into a brick wall, that the housing market was already tipping over, that the leveraged louts had run amok, yet the dance went on.

Far from converging, the Germanic bloc and Latin bloc have moved ever further apart (my apologies to readers who take umbrage at the terms Germanic and Latin - this schema stems from my years studying the Medieval Papacy under the great Cambridge historian Walter Ullman: it is not a value judgement on either camp).

Since 1995 - when the currencies were finally fixed - Germany has gained 40pc in unit labour costs against Italy, 30pc against Spain, and 20pc against France (European Commission data. - - - -).

This yawning gap between North and South confirms what Germany's eurosceptic professors have always argued: that the inflationary habits, wage bargaining structures, and productivity levels of the (now) 15 countries in euroland, vary too much to sustain a currency union over a long period. Germany has been able to squeeze wages until the pips squeak. Others have not.

Let me reassure my loyal poster 'Jorge' that this is not to blame Club Med. Real interest rates were set far too low for their needs in the early phase of EMU, leading to unstable credit booms. The Latins are victims of this experiment, even if they do not yet know it.

I dissent vehemently with the anti-Latin thrust of comments by Otmar Issing, the ECB's ex-guru, who said that "several countries did not fully understand what signing the Maastricht Treaty and joining EMU would imply". The truth is that every single country failed to understand what EMU implied, especially Germany.

The North-South rift is still getting wider. OECD data released this week shows that unit labour costs in Germany have fallen by 2.1pc over the last year. They have risen 3.7pc in Italy, and 0.8pc in Spain. The compound effect of this - year after year - is lethal for a currency union.

Germany is conquering market share across southern Europe in what amounts to a beggar-thy-neighbour policy. It now has a current account surplus of 6.2pc of GDP, almost all at the expense of eurozone partners. The deficit has reached 9.2pc in Spain, and 14pc in Greece. Has it gone beyond the point of no return? Perhaps.

Read yesterday's EMU report by the European Commission, starting on page 50 - bearing in mind the political constraints imposed upon the authors.
"There has been a tendency for growth, inflation, and current account positions to diverge across countries to prove rather persistent. As the participating countries are no longer able to adjust the stance of monetary policy to steer non-inflationary growth, the burden of macro-economic adjustment in principle shifts to fiscal policy. However, the limitations to discretionary budgetary policy are well known, due to long response lags and biases linked to the political cycle," it said.

My translation: the laggards are up the creek without a paddle.

"The large current account deficit in Spain may not be sustainable. The counterpart for this deficit is a rapidly growing indebtedness of household. A correction appears to be in store.
"Conversely, the current account surplus in Germany my have overshot in the other direction, reflecting a persistent imbalance between booming exports and sluggish households. So far there have been scant signs of domestic demand taking over the growth baton."

My translation: Germany is not doing its part to make the system work (just as France and the US failed to do their part in the inter-war years to make the Gold Standard work) the self-correcting mechanism in EMU has completely failed.

"A first group of euro-area countries - Germany and to a lesser extent Finland - has steadily improved its competitiveness position vis-a-vis the rest of the euro area since 1999. In the case of Germany, the real depreciation trend downs not yet seem to have come to an end."
"A second group - Austria, France, and Belgium - maintained their competitiveness positions," (I suspect that a vigilant French fonctionnaire in Brussels tweaked the text to promote France into Group 2, since the data points to slippage into Group 3).
"A third group - Greece, Ireland, Italy, Portugal, the Netherlands, and Spain - experienced a significant decline. Spain and Ireland portray the biggest losses."

Keep an eye on Spain. Over 40,000 estate agents have already shut their doors, according to the realtors' federation. There are 600,000 unsold homes on the market. Unemployment is rising at a rate of 90,000 a month (seasonally adjusted). UBS says the country has built up cross-border liabilities of $362bn, much of it owed to German and French bank, and is facing a foreign "funding freeze".

Jean-Claude Trichet, the ECB's president (whom I admire, by the way), likes to reassure us that the eurozone's divergence is no greater than the variations between US states. One blushes to hear such a decent man repeating this canard.

Nothing comparable to the German-Italian chasm exists in modern America - though it did in the Reconstruction era after the Civil War, when the Yankee dollar blighted the conquered South.

In any case, America has an arsenal of self-correcting devices: a single Treasury commanding 20pc of GDP, with automatic tax transfers from boom zones to bust zones; a single social security, medicare system; a single language and culture making it easier for workers to chase jobs across state lines, levelling the imbalances.

Above all, everybody knows that America is a sacred union forged by wars and shared history. Solidarity is total. Pennsylvania will not let California fail. Do we know this about Europe?

We forget now that the euro was launched for entirely political reasons by Mitterrand, Kohl, and Delors against fierce objections from the German Bundesbank and the European Commission’s own economists. The experts warned that the eurozone was not an "optimal currency area" (OCA), and would necessarily become deformed over time. The politicians refused to listen.

Indeed, Mr Delors' circle relished the idea of a beneficial crisis -- "the worse, the better", I was told by one EU official who attended his Cabinet sessions -- believing it would enable Brussels to advance the European Project. A euro crisis would be the midwife of a full federal economic system.

Romano Prodi said as much in a moment of candour as commission president. "I am sure the euro will oblige us to introduce a new set of economic policy instruments. It is politically impossible to propose that now. But some day there will be a crisis and new instruments will be created," (Financial Times, 4 December 2001). Precious, isn’t it?

This may backfire. Remember that no democracy in Europe has ever voted for the euro. Denmark and Sweden are the only countries that put the matter to a popular vote. Both issued an emphatic 'NEJ'. Perhaps Germany would have voted Yes. We will never know. The German people were never asked. That fact alone will have heavy consequences over time.

Creating the euro to force the pace of European integration is a dangerous game. A botched EMU may ultimately lead to such bitterness and rancour that it shatters the union altogether. I put the odds of that at about 30pc.

Yes, the euro has become a world reserve currency. Russia, China, and the Gulf Sheikdoms have invested hundreds of billions in EMU bonds to diversify out of the dollar, pushing the exchange rate to ever more extreme levels. The euro-imperialists have got what they wanted: a reserve currency big enough to challenge dollar hegemony. Now they must live with the heavy consequences.

Yes, EMU is a remarkable achievement of political will, the first stateless currency created by a group of roughly equal sovereign nations, without a hegemon.

Yes, it has shielded Club Med from the storm of the credit crisis, as Brussels officialdom has been telling us all week. But that, precisely, is the problem. Fixed exchange rate systems can mask the rot, allowing countries to persist in folly until it is too late.

As an old friend at the European Commission once told me, EMU is like a pressure boiler where the warning thermostat has been switched off, and the escape valve shut. That is how you get an explosion.