THE BIGGEST THREAT TO THE EURO

At this moment the biggest threat to the Euro comes not from the Cyprus bailout from the prospect of of its biggest members, particularly Germany sticking with misguided auterity policies.

Look at the EU dashboard:

• Unemployment: 12% and rising
• Industrial production: continuing decline
• Peripheral government fiscal balance: large, persistent deficits
• Private sector loan growth: negative

The Eurozone is in persistent recession with high and rising unemployment, large fiscal imbalances, declining industrial production and ongoing credit contraction.

• In Greece and Spain, the unemployment rate is stuck above 25%
• In Ireland, Italy, France, Portugal, it is into double figures.
• Large swaths of the European economy are slowly rotting away.

No democratic political arrangement can survive an indefinite economic slump. If measures aren't taken pretty soon to revive spending and hiring, exenophobic anti-Brussels parties will eventually gain popular support in some (perhaps) many countries. And, meanwhile, the soured loans resulting from the slump will continue to undermine the continent's banks.

But such an outcome isn't inevitable. Strictly as a matter of economics, there is nothing to prevent a policy of reflation being adopted. If this plank were to be combined with a coordinated fiscal expansion, led by Germany, the European economy would start to grow again, and the financial crises in place such as Spain and Italy would recede. So far, Chancellor Angela Merkel who faces parliamentary elections later this year, has resisted such a shift. But as the Euroland recession starts to bite at home and abroad- in the last quarter, the mighty German economy contracted- the development of German thinking bears watching. Having imposed tough bailout terms on the heavily indebted peripheral countries, the German chancellor is in a much stronger position to argue to her voters that a policy of reflation would'nt merey be rewarding the irresponsible, it would also be in Germany's interest.

The Germans think that the lesson of their history is that inflation leads to political chaos. IT IS NOT. The lesson of German history is that deflation leads to political chaos. They have somehow forgotten that 1929-1933 was a period of deflation, depression and unemployment.