The other side of the coin is that it makes European industry less price competitive. On the other hand that’s the least of Europe’s problems right now.As for Britain, it’s hard to know what to make of our piggy in the middle position. The Bank of England thinks it will help to make sterling weakness less inflationary than it has been in the past, while its depreciation against the euro will be a boon for beleaguered manufacturers. So in America, Europe and Britain, everything is working out for the best in the best of all possible worlds is it? Now why does that seem so unlikely?jeremy.warner independent.co.uk. Could the eurozone become a successful economy during the life of this Parliament? That surely is the key question – not the tussle between the Prime Minister and the Chancellor – that will determine whether the Government dares to risk a referendum on British entry.

Why cuddle up to a corpse?On the other hand, were the eurozone to put on a spurt of growth, outpacing both the United States and Britain, then you could see a window of opportunity when the electorate might be persuaded to give the euro-enthusiasts the benefit of the doubt.So it all turns on whether the superior performance of the British economy can be sustained: whether the record charted in the two graphs is likely to continue.As you can see, the record on unemployment is unequivocal On growth the judgement is more mixed. Cumulatively we have done much better, but much of the superior performance was during the middle 1990s when sterling was particularly undervalued.In addition, we have benefited from getting more people into employment and the extra growth that has stemmed from a consumer boom financed, in part, by additional borrowing.As far as the eurozone is concerned, the most immediate issue is deflation. The European Central Bank (ECB) will almost certainly cut its interest rates next month, the only issue being whether the cut is a quarter or a half per cent. But even a half per cent cut would only offset a 2-3 per cent rise in the value of the euro, and the euro has risen by about 13 per cent this year.In any case, the ECB has to set rates for the entire region, and inflation performance has diverged sharply. In the final quarter of 1998, just before the euro was formally launched, the gap between German inflation and the average was only 0.7 per cent.

In the first quarter of this year, it was 1.8 per cent.So whatever the ECB does, it is almost certain to impose rates on Germany that are too high, and it is very hard to see what can be done about this. Deflation in Germany now seems almost certain.In public relations terms, that will be devastating for euro-enthusiasts, because it highlights the fundamental flaw in the design of the eurozone: that low inflation countries get the highest real interest rates and vice versa.It is also bad news for the economies most closely tied to the German market, such as the Netherlands and France. But the fringe countries, such as Spain, could continue to do quite well. It is a reasonable question to pose: could the rest of the eurozone perform well enough over the next two years to pull Germany out? If it could, then, it might be possible to make the positive case for the euro a credible one.A lot depends on the course of the euro and of the dollar.

Expect sterling to continue to trade between the two in its usual mid-Atlantic manner, veering closer to one for a few months and then moving a bit closer to the other. If the fall of the dollar becomes really serious and the rate against the euro were to move to, say, $1.30 or beyond, then the eurozone recovery could be set back another couple of years.That sort of level is perfectly plausible Indeed. the Merrill Lynch “fair value” calculation puts the euro at $1.31. Merrill reckons that the rise of the euro will knock 1 per cent off the eurozone’s nominal growth both this year and next, while adding 2 per cent to nominal growth in the US.The rise of the euro redistributes both growth and inflation away from Europe and towards the US, and to a lesser extent the UK.