The German-led austerity programme for the peripheral eurozone states is patently failing.
The European Central Bank (ECB) may have stabilised markets by keeping the single currency afloat, but the credibility of the policy steps are seriously damaged by increasing debt and hardship faced by many countries.
This month the International Monetary Fund, which has been closely working with the European Commission and the ECB, admitted that it underestimated the impact of austerity that has mired Greece in recession for six years.
Many have suffered from the IMF-imposed discipline urged by Germany — Europe’s wealthiest economy.
New figures from Deutsche Bank show that Italy is accumulating debt at an alarming rate and it could reach 140 per cent of total output (GDP) in a few years. Spain will take its debt to over 100 per cent of GDP by 2013-2014.
Across the Continent, youth unemployment has reached 24.4 per cent. Disaffection is fuelling the growth of right-wing movements, like those in Hungary, that have a distinct antisemitic flavour.
The currency union lacks transfer mechanisms. Germany used low production costs and the union to develop its exports of manufactured goods, like BMWs, to the poorer countries of southern Europe.
As a result, Germany has accumulated fiscal surpluses because of the competitiveness of its goods.
As incoming Bank of England governor Mark Carney has highlighted, the Ottawa government in Canada has superior policies and mechanisms that allow the wealth of oil rich Alberta to be shared with the poorer parts of Quebec and the Maritime provinces.
Similarly, in the United States, the wealth of the North-Eastern and Western states is shared with the less well-off states in the South.
Without a system to redistribute surplus income to deficit nations, currency unions are doomed to failure.
So far, Germany’s conservative economics has prevented comparable transfers from happening. How quickly it has forgotten its own history.
At the start of the Second World War Germany’s debt was an astonishing 675 per cent of GDP — a figure that dwarfs anything going on in Europe today.
If Berlin were to begin the process of allowing more generous transfers to its partners on the periphery of the eurozone, then the road to recovery would be faster and the risks of severe social dislocation eased.