Thinking the unthinkable on the euro is no longer so wild. Even HSBC is doing it.

Even a euro-friendly newspaper such as our own can hardly ignore the fact that the going has got extraordinarily tough for the single currency over the past six months. Italy and the Netherlands have unexpectedly moved into recession, the German Chancellor, Gerhard Schröder, has decided to go for a general election a year ahead of schedule, France and the Netherlands have rejected the proposed EU constitution, the stability and growth pact has been significantly watered down, and the EU's budget negotiations have become mired in national conflict.

Yet though the UK media has in large measure seen all this as presaging an eventual and inevitable collapse of the single currency project, the capital markets have so far shrugged it aside and remain in sanguine mood. Since the beginning of the year, the euro has weakened in trade weighted terms, and bond spreads have widened a bit, but by nothing like enough to indicate anyone seriously believes the euro to be in any danger.

Is it time to think the previously unthinkable? One top drawer bank that thinks it might be is HSBC, which breaks ranks in taking the view that the stresses and strains all too apparent within the eurozone may bring about its eventual collapse. No one should underestimate the degree of political commitment in Europe to sustaining the single currency, which in some respects has in any case been an outstanding success. In technical terms, the introduction of the euro was flawless. It has also rapidly established itself as a credible alternative to the dollar as a reserve currency. That plainly wouldn't have happened if anyone seriously believed the euro was about to come apart at the seams.

Yet as HSBC points out in a circular just published - European meltdown? Europe fiddles while Rome Burns, by Robert Prior-Wandesforde and Gwyn Hacche - that commitment is already being tested to the limits. Of course, the economic paralysis that grips large parts of Europe cannot wholly be explained by the single currency. In large measure it reflects an absence of liberalising, structural reform.

Even so, the main economic case against the euro - that a single interest rate for the whole of Europe can never be appropriate - has been dramatically highlighted by recent developments. As HSBC points out, it may only be a matter of time before Germany and the Netherlands are dragged into outright deflation, while Italy seems destined to move in and out of recession for possibly years to come. Meanwhile, huge property bubbles and current account deficits are developing in other member states.

HSBC suggests three possible outcomes. The most desirable is plainly that sufficient economic and institutional reform is eventually delivered to improve the functioning of the single currency. Those of us who saw the euro as a catalyst for such reform have been bitterly disappointed by its failure so far to galvanise Europe's politicians into action.

Yet there are two far less appealing alternatives. One is that Europe adopts protectionist policies to shore up uncompetitive domestic industries. Any such approach would be little short of disastrous, both for Europe and everyone else. A second possibility is that the situation eventually becomes so intolerable that political commitment collapses and the euro unravels. Given the investment in capital and goodwill that has already been invested in the single currency, this would be an equally cataclysmic event with wholly unpredictable consequences.

Reform is the only viable solution. Unfortunately, it is still far from clear that the political will exists to push it through. The odds on the unthinkable eventually happening are, as a consequence, narrowing fast.

Some signs of life at Marks & Spencer

According to Stuart Rose, it is not a question of "if" but "when" the Marks & Spencer share price achieves the £4 which the retail entrepreneur Philip Green conditionally put on the table last summer. Yesterday, the shares came that little bit closer, rising by 2 per cent to 365.75p on the back of a relatively well received first-quarter trading statement.

At first blush, it is hard to see why. Like-for-like sales were down 5.4 per cent, which admittedly marks a slowing in the pace of decline and against such a generally poor retail environment might be seen as not too bad. However, the breakdown shows that general merchandise, which includes the core clothing business, was down a sickening 11.2 per cent. Against that, food was up 0.7 per cent, so on this front at least Mr Rose seems to have stopped the rot. The company's sugary advertising campaign - this is not just food, it's Marks & Spencer food - is plainly having some effect.

Yet ultimately, Mr Rose will be judged on his ability to turn the clothing business around and though he could hardly have had a more difficult backdrop against which to perform, the bald figures continue to look grim. There are, however, one or two encouraging signs. One is that there is no reason yet for analysts further to trim their profit forecasts for this year, with the consensus at around the £690m mark. Another is that the company is carrying 40 per cent less stock into its summer sale, which in itself should protect selling prices and margins. Full sale prices in the last quarter fell by only 2.4 per cent, another encouraging sign.

All this makes a sound platform from which to stage a worthwhile recovery. Marks out of ten? Mr Rose reckons he deserves seven on the product and price offering. That may be a little bit generous for this stage of the game, but he certainly seems to be getting there. Even so, if someone popped up offering £4 a share again, shareholders would bite their hand off in their desperation to accept.

Bank must give growth a chance

Unemployment is on the rise again, albeit by hardly enough to be noticeable. Nevertheless, June's slight increase in the claimant count is the fifth month in succession that there has been a rise, and if proof were needed that the economy has slowed markedly, this provides unambiguous evidence.

The big question for the Bank of England is whether the pronounced slowdown in consumption that has occurred since the turn of the year is just a temporary phenomenon which given time will transmogrify into more balanced growth, or the start of something more serious. The terrorist atrocities plainly haven't helped matters - London feels dead right now, more like August than mid-July - even if the evidence of previous attacks is that the economic effect of such attacks is short lived. Yet if things are teetering on the brink already, they might just help to push them off.

The Bank of England was undoubtedly right not to have cut interest rates on the day of the atrocities, when by coincidence its Monetary Policy Committee was meeting in full session. To have done so would have smacked of panic. But it might be unwise to delay further when the committee meets again in three weeks time. Admittedly inflation is at a seven-year high, but at just 2 per cent - slap bang on target - this scarcely seems anything to worry about just yet.

Matters would plainly become more awkward if the oil price were to rise much further. All the same, there's little to prevent a cut as things stand, and as Kate Barker, a member of the MPC, pointed out yesterday, the object of policy is to target inflation in the medium term, not as it is today. Lower growth means less inflationary pressure, which in turn means that interest rates can be lower than they are.

If a cut proves misjudged, and the economy rebounds sharply in the autumn, such action is unlikely to prove a disaster and in any case can swiftly be reversed. Best to get on with it at the next available opportunity.

j.warner@independent.co.uk