When will the euro collapse?

Will the overvalued euro cause the currency to collapse?

Spain allowed inflation to run out of control. The country reported retail inflation of 5.3% today, way ahead of the eurozone average of 4.1%. As a result of runaway inflation over several years, Spain now has a massive balance of payments deficit - 10% of GDP. Portugal, its neighbour has a deficit which is just as bad and the European basket case, Greece, has a current account deficit which is now 14% of GDP.

Argentina's economy let its currency become massively overvalued until 2001. The balance of payments grew massively, imports ballooned as cheap imports flooded in and then the currency and economy collapsed.

Companies in Spain are now collapsing as the economy starts to fall apart. Half a million people have lost their jobs there in the last year. Few companies or individuals are in a position to borrow enough to finance the current account deficit. The ECB can send some of its money in to the banks and the government can borrow but the longer this goes on the more the debts will be if and when the final collapse occurs.

Italy is another casualty of the eurozone. European Commission President Jose Barroso's economic advisor, Professor Paul de Grauwe, argued that the euro had damaged Italy's economy and that without "political union" in Europe, the euro will collapse in ten to twenty years.

Professor de Grauwe claimed: "The euro is a bad thing for the Italian economy. I'm afraid that Spain is also evolving in the same direction. If that happens, we are stuck with a big problem." He claims that developing a "political union" is the only way to mitigate the problems created by the euro, saying: "A political union is the logical end-point of a currency union. But if that political union fails to materialise, then in the long term the euro area cannot continue to exist."

But there will be no political union. So is the endgame for the euro now being played out?

In August, Not Wellink, the Dutch central bank chief and a member of the ECB council, said that banks were becoming addicted to the liquidity window in Frankfurt.

Wellink did not name the main culprits, but hints indicate there are growing concerns about the scale of ECB borrowing by certain Spanish financial outfits with access to the ECB piggy bank. The Bank of Spain reports that the country's banks have increased their ECB borrowings to €49.6 billion.

This surreptitious bail-out is mainly underwritten by German and north European taxpayers.