Hamish McRae: The euro is doomed - but not just yet

If eurozone growth continues to disappoint, the idea of a single currency will be indefensible

How times change. If, a few months ago, you said to a public meeting on the Continent that you thought the eurozone would eventually break up, you would be greeted with polite indifference. People did not even bother to get cross with you. The idea was such a silly notion, a naïve, out-of-touch British view, that it was not worth commenting on. Of course the euro would survive and of course eventually Britain would join, though perhaps on less favourable terms than would have been available had Britain joined at the beginning.

How times change. If, a few months ago, you said to a public meeting on the Continent that you thought the eurozone would eventually break up, you would be greeted with polite indifference. People did not even bother to get cross with you. The idea was such a silly notion, a naïve, out-of-touch British view, that it was not worth commenting on. Of course the euro would survive and of course eventually Britain would join, though perhaps on less favourable terms than would have been available had Britain joined at the beginning.

The great change is that European officials cannot now ignore people who say they think the eurozone is doomed. They can disagree with them, they can be snooty and say their opponents don't understand enough about the European Union, they can get cross. But they cannot ignore the issue. The failure of the French and Dutch governments to win support for the constitution has on the face of it nothing to do with the euro. But because the ordinary people have rebelled against their leaders, it becomes possible to question the wisdom of other top-down political initiatives, of which the euro has become one of the most unpopular.

So what will happen? Well, I am pretty sure that the political glue that holds the European Union together is strong enough - at a political level - to preserve the EU in its present structure for some time. Some elements of the constitution will be incorporated into existing treaties. Whether it can carry on taking in members is another matter.

Economics, however, are different from politics. You cannot just put things on hold or roll them back a year or two, for the world economy moves on. The slippage in economic performance of the core eurozone countries predates the introduction of the euro. Until the early 1990s, the main continental European economies were broadly holding their ground with the US. It is only since that that they have seriously slipped behind in their performance.

It is true that some of the eurozone members had a big struggle in the second half of the 1990s to cut their fiscal deficits by enough to qualify for euro membership. Unsurprisingly, a couple fiddled the figures to get themselves in. We know too that the eurozone has recovered more slowly than the rest of the world from the post-2001 slowdown. But it isn't fair to blame the euro for all the under-performance - and in any case, that is all in the past. The question now is whether the rigidities imposed by euro membership make it more difficult - too difficult for some - to escape from this relative economic stagnation.

Much depends on what happens to the world economy. The world is four years into the present growth phase. It is currently experiencing some sort of pause, more evident on the continent than in the US, but my guess is that there will be at least another couple of years of growth. Then, for reasons that we can guess but cannot clearly identify, this growth phase will end.

While the world economy goes on growing, the eurozone economies will go on growing, albeit at a slower rate. Italy is in recession now but by the end of the year, helped ironically by the recent fall of the euro, it should be growing slowly again. The first really big crisis for the euro, then, is at least a couple of years ahead - the timing depending on the world economy.

Now - and this is pure guesswork - I think the eurozone will get through this crisis. The political will to get Italy and weaker eurozone members through would be enormous. So too would the embarrassment that European politicians would feel were a currency union, that was supposed to last forever, fall to bits in a decade. Besides, the poor performance of the eurozone, evident now to economists, will still not be so overwhelmingly evident to European voters in another three years that they will demand change.

I think the great pressure will come when the next cycle runs into trouble, some time in the mid or late "teens". It may seem absurdly mechanistic to proclaim that there will be a slowdown in about three years' time, that it will be followed by a growth phase, and that phase too will come to an end. But there does seem to be such a thing as an economic cycle and that the growth phases of these cycles are ended by a variety of malfunctions, including a surge in inflation and energy prices, and/or a bout of over-investment.

In another 10 or 12 years' time, if eurozone growth continues to disappoint, the idea of a single currency will become indefensible. By then it will have become clear that cramming such a diverse set of countries into a monetary area with a single interest rate means that most of those countries will not have had the flexibility to run their economies successfully. The costs of having the wrong interest rate are huge: deflation for some, inflation for others. Even if the euro will not have been the sole difficulty - and it is wrong to blame what is partly a set of micro-economic problems on the macro-economic structure - the euro will get the blame. And that is the moment when people will take control from the political elite and get their currencies back.

If the European political elite is wise it will have a Plan B. Politicians denied that they had a Plan B to cope with the failure to cope with the rejection of the constitution but of course that isn't true. It was already in their heads - or at least in the heads of their advisers - and we will see it unfold in the coming weeks. But a collapse of the eurozone would be harder to manage. Because the switch to the euro had to be deemed permanent, it really did become impossible to have a plan for countries to leave it ready and waiting. Now, given what has happened, the authorities would be wise to do so, for they can be absolutely certain that the financial markets will be figuring out the consequences.

The best outcome of all this would be for the European political elite to think a bit less about politics and focus a bit more on economics. The punters have rejected their politics so they had better make sure they don't reject their economics too.

So the elite should start to think seriously - and apolitically - about the reasons for the failure of the Lisbon Agenda, which was supposed to help Europe catch up in technology terms with the US. They should think about the relationship with Russia, the country that will become an ever more important supplier of energy to the EU. They should look at European regulation and see to what extent that accounts for poor performance. They should identify the areas of economic excellence in the EU and try to get the lagging regions to learn from the success stories. They should look at tax.

None of this is very difficult. It is basic economic reform stuff. Why not get on with it?