Many people in Greece believe there is a conspiracy to destroy the euro. How else can it be explained that their country has to pay soaring interest rates on its state bonds, even prime minister George Papandreou wonders. Greece is executing a rigorous reform program to cut the government budget, and has been put on a short leash by the European Commission.

Portuguese prime minister José Socrates, whose country, like Greece, is facing budget overruns and rising interest rates on state bonds is blaming the financial crisis for forcing governments to make unplanned investments, and the irresponsible behaviour of rating agencies. He complained to French daily Libération that Portugal's budget deficit is no higher than the EU or G20 average, yet investors “do not care about the reality of the economic situation, they are grounded in certain assumptions and impressions". He invited the analysts he holds responsible for Portugal's downgrades to "come and see the reality on the ground".

Elena Salgado, the finance minister of Spain, the third euro country punished by investors last week despite announcing additional cutbacks, lashed out at European Commissioner Joaquín Almunia, who had said Wednesday that Greece, Spain and Portugal “share common problems”.

The first storm

These European politicians are right that irrational elements - what they call "animal spirits’’ and "lack of confidence" - are at play in the havoc caused by investors on the southern edges of the euro zone. But they are all too well aware this is not the real cause of the decay that is creeping into the zone. The true reason is that the European Monetary Union is not backed by a political union.

Deepest crisis in 11-year history European policymakers scrambled to reassure markets about the stability of the 16-nation currency bloc as investors shed euro assets on Thursday and Friday. Greece and other bloc members with swollen deficits like Portugal and Spain face intense pressure to get their public finances in order and calm markets worried about the risks of a sovereign default. In the deepest crisis in the zone's 11-year history, analysts are no longer discounting the possibility that a smaller member such as Greece could be pushed out, though most believe the monetary union will survive. The euro fell below sunk as 1.3639 US dollars in morning trading in New York. The cost of insuring Greek, Portuguese and Spanish government debt against default shot to record highs in volatile trading and the premiums investors demand to buy euro zone government bonds other than liquid German benchmarks rose strongly in the morning before easing somewhat. Source AP/Reuters

National politicians have themselves created the environment in which rating agencies judge countries much more severely than they have banks, and investors to make big money on their misery. It doesn't take a European federalist to understand that a currency shared by 16 heterogeneous economies, which don't coordinate their budgets or tax policies to some extent, can falter. Add to that the lack of a solidarity clause to ensure countries help each other out in times of economic distress, and the monetary union is vulnerable to the first storm.

The euro is at risk today because the eurozone’s governments have consistently refused to give up their budgetary and fiscal sovereignty in the past 11 years. They wanted the euro all right, but not at that price.

Some European politicians understand the eurozone has arrived at a crossroads: it must either demonstrate political vigour, going against eurosceptic public opinion to work on greater political integration, or it does nothing and face possible disintegration of the currency. Among those who realise this are eurogroup chairman Jean-Claude Juncker (Luxembourg) and EU president Herman Van Rompuy (Belgium). Van Rompuy will be hosting a summit of government leaders next Thursday and he and Juncker, who are close, are looking for ways to make a virtue of necessity.

A wake-up call

One obstacle is that Van Rompuy is more of a pensive type than a showman, and he has remained quiet on the issues in public. That is not the way to sway investors. Juncker, meanwhile, tries to soothe the markets with comments like: "There is no threat, there is no danger" (to the Greek newspaper Kathimerini). Op-ed pages, meanwhile, are advocating a quick IMF bail-out of Greece, while political decision makers fail to say in public what they keep promising backstage, that they won’t let Greece down. But the markets are not convinced; they smell doubt.

For years both supporters and opponents of greater European integration have been warning the euro is vulnerable because each country wants to make its own decisions when it comes to receiving and spending money. Former German chancellor Helmut Kohl - representing the pro-camp - warned back in 1991: "Recent history (...) teaches us that the idea of sustaining an economic and monetary union over time without political union is a fallacy." London banker Gerard Lyons used exactly the same argument in his campaign to keep the UK from joining the eurozone. In an article on a eurosceptic website he has listed the monetary unions that failed overt the centuries.

His conclusion , sounds very current: monetary unions only survive when they are backed by a central political government (US) or if they are formed by small countries that can do without a political union but have enough economic convergence (Belgium and Luxembourg for many decades, and that part of French speaking Africa which is politically, economically and militarily dependent on Paris).

“Monetary unions of politically independent large sovereign nations can fail, particularly when there is an external shock, causing the economic environment to change. It is easier for unions to survive when the economic cycle is favourable," he wrote.

Even without knowledge of the demise of the Scandinavian currency union (1873-1920), the German monetary union (1857-1914) and the Soviet monetary system, the euro is not sitting pretty. Some analysts, such as Belgian economics professor Paul de Grauwe in his book Economics of Monetary Union, believe it is possible to let a monetary union precede political integration, including joint taxation. The current malaise could be a wake-up call to do so.