As patriotic Britons, the authors of this blog would not normally be unduly upset by the impending self-destruction of the French economy, followed by the collapse of the euro. We are actually rather fond of France, and have met a number of agreeable French people, but a thousand years of rivalry leave their mark.

Yet the world has changed. Markets have become more integrated, and confidence is still shaky after 2008. Global recovery is a very fragile structure, jerry built out of any bits and pieces that were found lying around, and it sometimes seems that it would take no more than a sneeze to bring the whole thing crashing down.

Europe sneezed twice over the weekend. First the Greek people voted against the parties which approved of a technocratic government to implement the austerity programme demanded by the EU if Greece is to remain in the euro. This should have surprised no one. The fundamental weakness of technocratic governments is that for austerity to work in a democracy, the voters must accept responsibility for it, but they have no inducement to so that when the government and people have been separated.

Then came the election to the French Presidency of a man who apparently has no business experience whatsoever – it certainly looks that way from the financial illiteracy of his programme.

Could this be the beginning of the end of the deals put together by Angela Merkel, the forceful German Chancellor, to save the euro? Are Franco-Hellenic demands for renegotiation going to prompt other reluctant signatories to band together with them? If so, the German fiscal discipline that has been the only thing giving the euro any credibility will be gone. Then the euro will either become a joke currency – which the Germans will not tolerate – or the eurozone will have to split in some way.

Many may not see this as a bad thing. It has been obvious for some time that the euro in its current form is unsustainable. Few would object to an orderly restructuring – but that is not on the table.

The problem is that another forced restructuring of the euro, probably with all the errors that came with previous forced restructurings, will undermine the already fragile confidence of the world markets. Investors will worry about what they have already tied up in the eurozone and be reluctant to commit more. Business will worry about the reduction in European purchasing power. These worried investors and businesses are American and British and Chinese as well as European. It is ironic for someone who has never been convinced by the European project to have to write these words but, for the moment at least, the global recovery may depend on the preservation of the euro.

That said, the euro is clearly unsustainable and is proving to be a recessionary instrument itself. We have previously referred to it as The Devil’s Currency. Sooner or later it will have to be fundamentally restructured or abandoned altogether. We would normally argue for ‘the sooner’ as the longer these things are left the more pain is ultimately suffered by ordinary people, or in our case ordinary businesses.

However, our concern now is that the fragile global recovery, if indeed one is under way, seems to depend on the euro staying in one piece for the time being. But, let there be no mistake, the euro has done enough damage already. Once a recovery is on more solid footing that should be the end of this ill conceived project once and for all.

While the Olympians of high politics clash with the Titans of international finance over the mega-million deals necessary to keep Greece in the euro, is anyone actually interested in what happens to Greece?

The top priority for Greece is to build a modern economy. Bailouts and austerity packages of themselves build nothing. While it is true that Greece, like America, Britain, and practically every other Western economy, needs to sort out its public sector debt, that in itself is not enough. Teaching a government to stand on its own two feet is a necessary precondition, but no more than that – a first step.

The important part, and the really hard part, is generating private sector business that adds value to the GDP. Those protesting about cuts in public services ignore the fact that, without viable businesses making money to pay taxes, there can be no public sector services. Fresh injections of German money are not the answer – it is reliance on easy money from eurozone partners that led the Greeks to ignore private sector competitiveness in the first place: there was no need to encourage enterprise when the government could borrow more without negative consequences.

That was never going to last forever. Some day the bills must be paid. Now that day has come, but the Greeks’ neglect of the private sector means they have nothing on which they can fall back.

Greek business is unprepared for reality. It is reported that Greek VAT revenue has fallen by almost 20% since January last year in spite of a 10% increase in rates. Of course, tax revenues in general tend to decline not “in spite of” rate increases but because of them. Faced with a choice between passing the rate increase on to their customers or taking it from their own profit margins – which may have been less than the percentage rate increase even before the recession – many small businesses become unviable. No wonder 60,000 Greek businesses have closed since the summer.

At the same time the Greek government learns to live within its means, it must learn to love Greek business. Certainly it must pay more attention to its needs. Higher taxes are not helpful in this context.

If the government can become more business-friendly, there may actually be hope for Greece, whether inside the euro or out. There is no need for the country to remain on international welfare forever. It has a lot going for it – landscapes and history that attract visitors, an outward-looking view of the world that dates back to Homer and Herodotus, and an outstanding tradition of entrepreneurship. In sectors from catering to shipping, Greek entrepreneurs have flourished all over the world. What will it take to let them flourish in their native land?   

The euro crisis has now claimed a centre-left Prime Minister in Greece and a centre-right one in Italy. Leftist Spain is keeping a low profile, trying very hard not to be noticed – almost certainly in vain.

Yet it would be a mistake to write off the Mediterranean economies as “all the same”. Greece is a true basket case, a welfare state in the literal sense – a state dependant on welfare – underwritten mainly by the Germans. Italy, however, is in many ways a strong economy, at least in parts, with lots of viable businesses and an understanding of the need for international marketing. The present crisis is all about past deficits rather than future prospects.

Italy’s underlying problems go back a long way: weak governments since the beginning of the Republic encouraged structural inefficiencies. As a result, public sector debt has grown out of control under governments of both left and right. This could be ignored in the years of growth, but not since 2008.

Silvio Berlusconi attempted some reforms, but half-heartedly and largely without success.  So the markets rose a little on the news of his resignation – only to fall dramatically when realisation set in: If Berlusconi cannot deliver reform, who can?

There is no one in Italian politics with anything like Berlusconi’s power and personal dynamism. Although he has lost the high approval ratings he once enjoyed, the fact that he ever had such large majorities makes him almost unique among the Republic’s Prime Ministers, and he still has a larger block of parliamentarians and voters loyal to him than any other Italian politician. He might object to the comparison, but he was the most powerful Italian leader since Mussolini. He delivered an unparalleled period of relative stability in Italian politics. If he must share some of the blame for some of Italy’s failure to reform, he also deserves at least part of the credit for her recent prosperity.

Largely portrayed in the English speaking media as a buffoon, he is nevertheless a self-made multi-millionaire and understood business – unlike the career politicians and bureaucrats of the European Establishment, who never embraced him. His clowning led many to underestimate him: his road to power was over their political graves. He was a product of the openly corrupt Italy of the 70s, but he did not create the system that made him and which he exploited so skilfully. An unelected technocrat is unlikely to succeed where he failed.

Many Italians say openly that only a Mussolini can sort their country out. The EU seems keen to take on that role. For all his many, many faults, Silvio Berlusconi may yet go down as having been the last, best hope of Italian democracy.

At the very least, the eurozone will weaker without him – and a lot duller.

The markets are very nervous – and rightly so – about the debt crises in Europe and the United States.

Yet the frustrating thing about both crises is that they should be relatively easy to avert. They are not mega-tsunamis or planet-killing asteroid strikes that are beyond all human control. Nor are they mysterious: there is no need for a new Keynes to tell us what is happening, because anyone who can read a newspaper and do basic arithmetic knows exactly what the problems are. They are foreseeable and were foreseen, and indeed have both been rather unmissable for some years now.

Above all, they should be very easy to solve, given the political will. The solutions are not rocket-science. Everyone knows what needs to be done, and what will eventually have to be done.

In the United States, the government must stop spending as much as it does. The federal deficit is unsustainable. Sooner or later, there must be cuts, and there will be. Delaying the evil hour only makes it worse. Even the flawed Class of 2008 understood that there comes a time when unpleasant decisions cannot be put off.

In Europe, there is a limit to how much the more prudent nations can prop up the more feckless in order to maintain the pretence of a single currency. Does anyone, even the most sincere European federalist, really believe that Greece can and will remain a member of the eurozone indefinitely?

Everyone in the business world knows what has to happen. So – at least privately – do most politicians. So why delay? Everyone is agreed on the decisions that need to be made, so the sooner they are made the better.

Yet the political class seems paralysed with indecision. President Obama, obsessed with his re-election next year, has failed to take control of negotiations with Congressional leaders by advocating bold measures: once again, he has shown himself to be a reactive President, rather than one who seizes the initiative. Meanwhile, across the Pond, the European Establishment is terrified that suspension from the euro of Greece – and then probably Portugal and Spain, and maybe Italy and Ireland – will undermine the credibility of their whole cherished project of European integration.

It is tragic that in the whole pack, there is not one real leader with the guts to say, “We all know what we are going to have to do. Let’s just do it.”

For the real tragedy is that nothing magical is required here, only the courage and honesty to do what clearly needs to be done – in other words, leadership.

In our recent podcast on the euro, we discussed the possibility that the preservation of the European single currency might depend on weaker nations, such as Greece, leaving it.

That possibility is now being taken seriously by the markets.

It is, however, curious that they expressed their concern by devaluing the euro against the dollar. Logic dictates that the euro should be worth more if it does not have to underwrite the budget deficit of the spendthrift Greek government.

It might be the best thing that could happen to the euro if Greece left it for a while, followed by Portugal and perhaps even Spain. Those are the countries which ran up the worst government deficits – despite the euro’s supposedly strict rules – and which are still reluctant to tackle them. Ireland also ran up a horrendous deficit, but seems prepared to take firm measures.

Needless to say, there are vociferous official denials. Equally needless to say, those denials are not being believed.

The authors of this blog are not currency speculators, nor are we qualified to advise others on currency speculation, but, if we were, we might be tempted by the prospect of putting surplus cash into euros.

Something has to be done. Something is going to be done. If the Greek government and the other basket cases do not do it, someone else will. The Germans are getting impatient. When they act, the euro will be strengthened – and they will act soon if no one else does.

Just in case our last couple of posts are misinterpreted as another case of impecunious Brits taking jealous pleasure at the impoverishment of our once-wealthy American cousins, let us make it clear that we have a much bigger problem on our own doorstep.

The American problem is that recovery is too slow, but there is still recovery and the worst of the crisis is probably past, at least for the time being. The European Union, on the other hand, has not really addressed its deeper structural problem, and is therefore a crisis waiting to happen.

In fairness, the euro, the common currency of most EU states, is a symptom, rather than the cause, of this problem. There was always a hole in the deal: the euro is only as strong as its weakest economy. In particular, lax fiscal discipline on the part of a single Eurozone government undermines the whole currency. The mechanisms for imposing discipline were weak from the beginning, but everyone ignored them when times were good.

That is no longer an option. The party is over and the bill has just been presented. The EU, however, has even less leadership than the USA. The European response to the inability of overindulged states like Greece, Spain, and Ireland to pay what they owe has been described, elegantly but all too accurately, as “agreeing a funding mechanism but not funding it”.

Nationalised banks in Ireland are bust. This in turn puts pressure on the sovereign debt of the Irish government. Much of that debt forms a key part of the balance sheets of foreign banks – not least in Britain, which may therefore suffer despite the UK not being a Eurozone member.

This could impact on the whole economy. The equity market, still a little too bullish under the circumstances, may be in denial, but the rising price of gold suggests a lot of the smart money is playing it safe in anticipation of another crash.

Meanwhile, across the Atlantic, the Americans have some right to feel smug. The first phase of the infamous Troubled Asset Relief Programme – that is to say the initial bail out of the banks, as opposed to the later unnecessary “stimulus packages” – has been a qualified success. Buying up toxic assets, as opposed to nationalising banks, means the government has been able to get away with a quick “in and out”, with no longer term commitments on either side. Most of the American banks repaid the government very quickly in order to get it out of their hair, and stability was restored to the US banking system within months. Those who still carp about it can see the alternative in Ireland.

Remember 2008? Some people would like to forget it. They were the ones running around, predicting – in some cases without bothering to disguise their glee – the end of capitalism.

Some of us kept our heads and said “This too shall pass” – as, of course, it did. Yet the prophets of doom remain in high-salaried jobs with the mainstream media and government departments.

The same people were also very fond of lecturing us on how Spanish banks fared so much better in the crisis of 2008 because they were regulated more comprehensively.

This may be another of the pronouncements they would like to forget.

The EU has just carried out a series of “stress tests” on European banks. The much maligned British banks passed, but five Spanish banks did not.

This should not surprise anyone: more regulators do not mean better regulation – and regulation does not in itself instil a sense of responsibility.

Yet there is a deeper point. Despite over a dozen major crises, the West has enjoyed phenomenal growth since the development of modern capitalism in the late 17^th Century. Most of that growth has been due to the relatively high-risk investment strategies of banks following the “Anglo-Saxon model”. The alternative, investing mainly in government securities, would have left us in the Middle Ages, without the growth in private enterprise that is the foundation of modern prosperity.

The irony is that investment in government securities is not the safe option it appears. If the bankers of Spain and Greece thought the government bonds of their own countries were a firm foundation for their portfolios, they have been proved horribly wrong. It might actually be a safer strategy to broaden a portfolio with a few higher-risk loans.

This blog, which looks at things from the perspective of small business, treats bankers with caution, but we cannot deny that we need them – and, although they will never admit it, they need us. It is in our interest and theirs to keep banks lending to business, even when it seems riskier, on a superficial level, than sticking to government bonds or building up reserves. Business and banks should unite – for once – and speak out in defence of the “Anglo-Saxon model”. The evidence is on our side.