Andreas Whittam Smith: The euro may follow the constitution into oblivion

A recent poll showed that some 56 per cent of Germans want a return to the mark

The euro is in deep trouble. Before the French and Dutch referendums, it was seen as a stable currency system with internal difficulties. Since these polls it has become a potentially unstable system with internal difficulties. Popular hostility to the proposed European constitution has unexpectedly expanded to include monetary union. This is highly significant.

The euro is in deep trouble. Before the French and Dutch referendums, it was seen as a stable currency system with internal difficulties. Since these polls it has become a potentially unstable system with internal difficulties. Popular hostility to the proposed European constitution has unexpectedly expanded to include monetary union. This is highly significant.

On Friday, a government minister in Italy, one of Europe's weakest economies, bitterly criticised the euro. Roberto Maroni, the welfare minister, told the daily newspaper La Repubblica that a referendum should be held to decide whether to bring back the lira. The euro had "proved inadequate in the face of the economic slowdown, the loss of competitiveness and the jobs crisis".

A few days earlier, a meeting of top officials in Germany, a relatively strong country, had discussed the shortcomings of European monetary union. They were studying a finance ministry document warning of brutal divergences in the eurozone's growth, credit and price levels. The text said that lower interest rates had brought "enormous" advantages to Portugal, Greece, Spain and Italy, as they enjoyed the windfall benefits of Germany's coveted credit rating. Germany's slump of recent years was directly linked to the euro.

A recent poll showed that some 56 per cent of Germans now want a return to the mark. Hostility to the euro was also a factor in the rejection of the European constitution even in relatively prosperous Holland. In France, on Saturday, a member of Mr Chirac's ruling party, Nicolas Dupont-Aignant, said: "France, Italy and Germany would be in a better state without the euro."

What these developments suggest is that citizens of the 12 eurozone countries are getting ready to blame the euro for their economic woes. Indeed they see the creation of the eurozone as a further example of the arrogance of their various "élites". This means it is a reasonable assumption that the euro will become an issue in national elections within the eurozone.

Of course European leaders immediately dismissed the possibility that a member state could ditch the euro. But never forget that politicians and central bankers are quite prepared to lie when it comes to defending a currency. In such cases they believe the means justify the ends.

Meanwhile, the value of the euro on foreign exchange markets depends upon what foreigners think. If you are planning to buy a holiday or retirement home abroad, you must wonder whether it would it now be best to avoid a euro country. I, too, as a trustee of a £4bn fund, some small part of which is invested in euro securities, must, like many others in my position, consider what to do. Infinitely more important will be the attitude of a number of Asian central banks which have been diversifying out of dollars into euros. What conclusions will they reach?

Hitherto, holders of euro assets have believed that the currency is backed by 10 countries, some strong, some less impressive, bound together by a set of rules, the so-called stability pact, that ensure sensible economic policies. They thought that these limits would gradually bring about a convergence between the performance of members. In this way, the eurozone would become a smooth-working, single economy. Of course, foreign holders have seen individual countries breaking the rules, but until now they have not been too concerned, assuming that discipline would be reasserted.

All this has now changed. In the first place, there has been precious little convergence. Germany has been growing slowly, while Italy is in recession. Spain is in good form, while France can't get started. Costs of production continue to vary across the zone, as do inflation rates.

Second, in the new political circumstances, with anti-European sentiment aroused, eurozone countries are even less likely than they were to observe the letter of the stability pact. For example, the new French Prime minister, Dominique de Villepin, Mas given himself 100 days to get employment expanding again. Is he going to feel himself bound by the eurozone rules limiting state spending? I doubt it. Third, the possibility that a member country will pull out of the euro is a new risk.

The upshot is that the euro will permanently trade at a lower level on the foreign exchanges than it otherwise would. The irony of this is that the best way to restore the currency's strength would be for Britain to join. As Le Monde put it the other day: Britain's absence "deprives the monetary union of the dynamism of the British economy and of the strength of the City". For some time to come, however, the British answer will be a resounding non.