The economies enjoying strong growth rates can shrug off oil prices rises, it seems. The US, China and, in Europe, Spain, see their output expanding. The more sickly, struggling economies reel as consumer spending is hit by higher energy costs. Graham Searjeant writes in the Times that oil is acting like a foreign tax on consumers, with the euro countries hardest hit.

The extra cash sucked out of the pockets of consumers and the profits of industry is already exerting a depressing influence. Taken as a whole, the eurozone is now taking over from Japan as the weakest link in the world economy.

This could easily affect the forthcoming German elections. The German industry federation has lowered its growth forecast from 1 per cent to 0.75 per cent, well short of the eurozone growth rate average of 1.1 percent. German voters might decide that a new leader and a new team might do better. They need more flexible labour markets, combined with lower business costs and employment costs. In brief, they need to dilute the continental social economic model, and sniff instead the fresh tang that free markets and lower taxes bring upon the wind. That will need a change of government.

A French judge has ordered the Swiss food giant Nestle to re-open a loss-making factory outside Marseilles. It closed in June after nine years of problems, due largely to falling demand for the decaf coffee it produced, leaving it running at 30% of capacity.

Nestle offered all 427 workers other jobs within the group, or early retirement. But this was not enough for the French authorities, who say Nestle have breached their strict code on factory closures.

In the Fairyland of France, forcing investors to pay people to make stuff that people no longer want might look sensible. Elsewhere it looks plain daft. How will you keep up with today's needs if you lock workers into producing for yesterday's needs? And if future investors think you might force them to produce loss-making lines - well, there is a whole world they can take their money to instead.

As we've seen from the 'bra wars', such protectionism is now rife in the EU. But I doubt that most EU countries are this daft - they've just been infected by France. MEP Dan Hannan says we should escape the infection by leaving the EU. It might actually be more efficient for the EU to get rid of France, and allow the rest of us to recover from this madness.

In the Times Anatole Kaletsky asks if it matters that Ken Clarke has described the euro as a failure. The point he is making is that it does not. Ken Clarke is a contender for the Tory leadership, and realizes that his support for a European federal state counts against him. The fact that he would sell his granny's skin for lampshades if it would move Britain closer into a federal union does not sit well with Tory MPs these days, much less with Tory voters. Hence the belated denunciation.

Kaletsky points out that artificial currencies like the euro depend on people's confidence in them.

Why does all this matter? Because the euro, like any other paper currency, is just an illusion; its power to command people’s lives and motivate effort depends entirely on a suspension of disbelief. People must not only think that these elaborately printed but worthless bits of paper will be exchangeable for valuable goods and services. They must also believe that their intrinsically worthless paper money will continue to be honoured for the indefinite future by the whole world. That belief, in turn, rests ultimately on the faith that the value of paper money will be upheld by a government with the right and the ability to levy taxes on a wealthy nation.

While Kaletsky does not say the euro is headed for oblivion, he clearly thinks this a possibility, with pressure from the Italians at the forefront. It is, to say the least, a challenging and interesting idea. On the other hand, one could argue that too much political capital has been invested in it for failure to be an openly admitted option. We live in exciting times; but Ken Clarke's views, coming so long after everyone else has seen how things are going, do not add to that excitement.

Italy's continued membership of the Euro is approaching crisis. Sometime between now and Italy's 2006 election, according to Anatole Kaletsky (Times), one of two things has to happen.

…either the European Central Bank (ECB) will have to ease monetary policy decisively to make economic conditions easier for Italy to live with — or Italy will have to withdraw from the eurozone.

Italy desperately needs an easing of interest rates and a fall in the Euro's value to boost its own economic performance. As Kaletsky reminds us,

Until 1997, when the Socialist Government led by Prodi took Italy into the euro, Italy was the fastest-growing leading economy in Europe, consistently outperforming both Germany and France. Since 1998 it has lagged in every single year behind France and in all but two years behind Germany.

He warns that an Italian withdrawal, or even a serious threat to do so, could bring the whole currency crashing in ruins. The problem is caused by an assumption that Italy has given up forever the right to its own currency.

European banks — unprofitable German mortgage banks in particular — have invested hundreds of billions of euros on a leveraged basis to pick up the very modest, but apparently risk-free, profits from buying Italian bonds and going short of their German equivalents.

This means that a serious threat of Italy leaving the Euro would trigger what Kaletsky calls "a financial crisis of monstrous proportions, not only (or even mainly) in Italy but throughout the eurozone."

There is a political fact he mentions as well. It is that this issue would give Prime Minister Berlusconi a chance to campaign on an issue for which his main opponent, Romano Prodi, was responsible.

France’s prime minister, Dominique de Villepin, has described the EU’s CAP as non-negotiable. “We agreed a compromise to the Common Agricultural Policy and the British signed up to it. It is a good compromise and should be applied to 2013.”

Well, yes. France similarly signed up to the British rebate somewhat earlier, and without a time limit. The point is that the CAP deal was a stitch-up between France and Germany when they thought that their agreement was all it took to get an EU deal. Times have changed. The new EU members, instead of “taking the opportunity to shut up”, as President Chirac suggested they should, now show every sign of wanting to be heard. The CAP consumes 40 percent of the EU budget; France is the biggest recipient, and 80 percent of that goes to big businesses rather than small farmers.

In return for negotiating on the rebate, Britain should push for a deal which phases out CAP for big businesses by 2008, and for small farmers by 2013. That will take some of the political pressure off governments.

The world is gradually moving the right way, with more globalization, more free trade, and more recognition of what poorer countries really need (markets and the end of subsidies). CAP stands out as an anomalous anachronism, out of place with modern attitudes and the modern world. The UK government has admirably recognized that fact, and bravely put it on the agenda. Now we want results.

Gordon Brown has identified the EU’s Common Agricultural Policy as a major cause of world poverty. In a speech to UNICEF he said that poorer countries resented "the hypocrisy of developed country protectionism." Toby Helm and George Jones report (Telegraph) his words:

We should be opening our markets and removing trade-distorting subsidies and, in particular, doing more to urgently tackle the waste of the Common Agricultural Policy by now setting a date for the end of export subsidies.

He surprised MPs by declaring his ambition to get rid of the CAP.

Mr Brown said: "Think of the Mozambican sugar producer who cannot compete with European sugar beet farmers because the subsidies Europeans receive enable them to sell more expensive goods at a cheaper price."

He is exactly right. All the pious talk of aid misses the point. Poor countries can climb out of poverty by selling their produce. The twin barriers of tariff walls and subsidies thwart them, and all the drib-drabs of aid will never alter that. They don’t want managed trade, with approved producers given artificial prices in protected markets. They want access to our markets and an end to unfair competition.

It is excellent that the Chancellor himself is saying this. Indeed, the speed with which ministers previously against the Adam Smith Institute’s position in areas such as Europe, free trade and poverty relief have leapt to endorse it is gratifying. We wish them success in their efforts to make it all happen.

Old Europe seems to be guarding the Common Agricultural Policy as if the EU would collapse without it. Any renegotiation of the Budget will be considered reluctantly and only if the CAP is sacrosanct, say the French president and German chancellor. This is curious economics and even curiouser politics

When the CAP was introduced a major objective was to maintain farm income. Ever since Roosevelt's New Deal, rich countries wanted to support farm income at a level comparable with manufacturing income. They supported farm product prices by tariffs on imports. The inevitable surplus was exported with further subsidy to reduce prices to world levels.

By the 70s we realized that not much income support went to poor farmers. Since returns were increased by subsidy, farmers could afford to pay more for inputs like fertilizer and machinery (offset as costs). Rents and the price of farm land increased. The relevant elasticities are hard to measure but farmers were lucky to retain a third to a fifth of the price support benefit. At the same time it was recognized that 80 percent of payments went to rich, large-scale farmers who did not need income support and were only 20 percent of the farm population. This is true today in France.

Some 20 years ago New Zealand removed farm support without catastrophic consequences. Without subsidy farmers paid less for inputs, got more for their products, and rents fell. The price of land also fell, increasing return on capital.

The CAP represents labyrinthine economics, but are the politics any more intelligible? Tony Blair now says that paying 40 percent of the EU budget to 5 percent of the employed is not sensible. The French want to defend the CAP. But why, if 80 percent of French farmers get practically nothing?

The French are only a generation away from the land, and seem to think that France depends on the CAP for survival. Americans are rightly sensitive to the rural vote in swing States like Ohio. Only the Brits, long urbanized, think farmers are feather-bedded and lack political clout. Few realize we need to lose half our farmers and perhaps cultivate our comparative advantage in Wilderness and National Park.

It would be ironic if the CAP, created as the raison d'etre for the Common Market became the vehicle of its demise. Perhaps the CAP is a totem preserved like some ancient icon, no longer relevant to the world, but revered as a symbol of heritage and history?

One generation passeth away and another generation cometh (Eccl 1:4). It is happening in Europe before our eyes. President Chirac and Chancellor Shroeder, whose alliance did so much to set the lead and the direction of the EU, are in the home stretch now. In both cases they seem likely to be replaced by more Atlanticist, free-market successors.

But it is not just the leaders who are changing. One vision of Europe has been passing away. It is the politically united Europe with strong central institutions modeled on the French state, and with social guarantees which lie in the continental tradition. That Europe, which was to stand up against America as at least an equal, would have had its president, ambassadors, army, and tax regime. It will never happen.

The new vision of Europe which is replacing it is less of a political force, but with a stronger, more vibrant economy. It is a Europe which can prosper in a world which includes China and India among its economic drivers. It will do so by reducing its taxes, subsidies and regulations, and by trading more openly and honestly. It will recognize the part which incentives and motivation play in economic expansion.

Experts and analysts are already placing the origins of the new Europe in John Major's long game, which bought time for Britain in opt-outs, while steady expansion tilted the EU balance to the UK view. It was indeed some time in coming, but the speed with which it has emerged looks more like a rout than an orderly transition. As the dust and smoke clear from the field, Tony Blair, who was UK champion of the 'ever closer union' centralizers, has emerged as leader of the skeptic forces, scattering and slaying the federalists. Anatole Kaletsky (Times) attributes some of this to luck, but more to Blair’s ability to bend luck his way.

Either way, it is a new Europe we are looking at. There will be a rearguard action to defend subsidies and regulations and the old ways of thinking, but it will lose. The new Europe seems set to be fashioned in Britain's image, and to have Britain as its leader. Not at the heart of Europe, but at the head of it.

Thoughts that Britain might be short of friends at the EU summit were dispelled in an interview given by Krisjanis Karins, Latvia’s economics minister. He told the Times that Europe needs to boost competitiveness by economic liberalization, and called for Europe to open its markets. Gabriel Rozenberg reports that:

Latvia, where corporation tax is now just 15 per cent, is one of the strongest advocates of open markets in EU and is seen as a "new Europe" ally of the UK…He urged the European Union to take seriously the Lisbon agenda, its market reform plan to create the world’s most dynamic economy by 2010, and to adopt the services directive which would liberalize the provision of services across the Continent.

Mr Karins thinks that since the EU constitution will not be adopted in the short term, Europe should go back to the basics of an open common market. He is right, and the signs are that others among the 25 members have had enough of the Franco-German engine driving Europe towards restrictive rules and an oppressive bureaucracy. Few want the low growth and high unemployment which the 'social model' has brought.

Maybe it is time to get tough with the Brussels-loving bureaucrats and begin taking Europe in our direction. We can start by renouncing the Common Fisheries Policy, and let them take us on a many-year journey through the courts. Then we can join with others in refusing to accept any more the Common Agricultural Policy. The Franco-German stitch-up fixed that until 2012, but we should make clear that it might be fixed for them, but it is not fixed for us. We should repudiate it on human rights grounds, given the numbers that it kills in poorer countries outside Europe.

Other countries such as Latvia might join us in a thorough review of those 100,000 pages of Brussels rules, as we strike down the ones which are no business of a central, unelected, bureaucracy, and very much the business of the peoples of individual member states. Britain is no longer isolated, and now is the time for us to join the new Europe in curbing the centralist designs of the old Europe.

I'd love to be a fly on the wall at the meeting of EU leaders in Brussels next week. Not only to enjoy all the recriminations following the rejection of the proposed EU Constitution by France and the Netherlands, but to see the bust-up over Britain's contribution rebate.

Mrs Thatcher negotiated the rebate - which saves the UK about £3bn a year on its membership dues - back in 1984, arguing that while her country paid much more than most in contributions, it got much less back in EU spending.

Downing Street says that the UK is the second largest net contributor to the EU budget, after Germany. Prime Minister Tony Blair said that even with the rebate the UK still paid 2.5 times more than France or Italy. Without the rebate, it would have been 15 times as much as France.

The main reason for the discrepancy is that a major part of EU spending goes on the Common Agricultural Policy, which subsidizes the hugely inefficient farmers of France in preference to efficient UK ones, as well as hitting developing world producers. Blair is saying that you can't try to reform what people pay in unless you also reform the daft way the money is paid out. For once, he's right.

Philip Webster and Anthony Browne report on this in the Times, and point to the somewhat one-sided nature of President Chirac's demands:

M Chirac excluded any challenge to a Franco-German deal on the agricultural policy, from which France greatly benefits. "We cannot accept any reduction whatsoever of the direct aids to our farmers," he said.

No CAP reform, no rebate reform. Enough said.

Tom Goeller at Techcentralstation has an interesting take on the German elections expected this autumn. If the Christian Democrats win with Angela Merkel (pictured with Wolfgang Gerhardt), as they might well, they will need a coalition with the Free Democrats, who will probably nominate the Foreign Secretary as they used to for many years.

The two FDP candidates, Wolfgang Gerhardt and Guido Westerwelle, both oppose the idea of building Europe as a counter to US power, and are more Atlanticist than the Schroeder government which has allied itself so closely to the French view. Both seek more friendly relations with the US, and are more sympathetic to US foreign policy initiatives than Germany has recently been.

The autumn elections could thus see a significant re-focus of German foreign policy, and with it that of Europe.

UK foreign secretary Jack Straw has made it official. There is "no point" in a British vote on the EU constitution, even though the French and German leaders want the ratification process to continue. With one bound Tony was free.

Treaty opponents divide into two camps. One of them was represented by Liam Fox in Parliament yesterday. He wants the constitution declared dead, and plans for a referendum completely abandoned.

I can tell a corpse when I see one and this constitution is a case for the morgue if ever I saw one - this is a dead constitution.

He didn't say he wanted a stake through its heart at the crossroads, but that brings us to the second group of opponents. Their view is that we should go forward and add our NO to the others. That way our opinion is clearly recorded. Otherwise, they think, the way is open for bits of the treaty to be led in through the back door or, worse still, for us to be manoeuvred into a revised treaty more friendly to 'social' Europe. They think Europe will be back.

Always after a defeat and a respite, the Shadow takes another shape and grows again (I wish it need not have happened in my time). To thwart or at least delay that occurrence, a British vote on the treaty is a chance to kick it while it is down, impeding its subsequent rise. Tony Blair would be obliged to campaign as pledged for a YES vote, and would find it difficult not to resign when it went down.

But there will be no such vote. A pity. French and Dutch voters had the fun and excitement of thumbing their noses at authority. The British should be allowed the same innocent pleasure.

The fate of the euro is again under discussion. We discussed here the report for Morgan Stanley by Joachim Fels which gave three reasons for uncertainty. One was the rising protectionist sentiment, a second was the likely rejection of the EU constitution, and the third was bigger fiscal deficits as the stability and growth pact ceased to be effective.

Now David Smith reports in the Times that European ministers will be unable to prevent further weakness in the euro following political instability.

Speculation about a euro break-up intensified when an Italian government minister mused publicly about the return of the lira, and Stern, the German news magazine, reported that Hans Eichel, the German finance minister, and Axel Weber, the Bundesbank president, had discussed the break-up of monetary union with independent economists...

A report last week from Charles Stanley Sutherlands, the stockbroker, put a 50% probability on at least one country leaving the euro by 2008, and said that its complete collapse by 2020 was "inevitable".

One of the biggest threats to the euro is the inability or unwillingness of some of its leading players to undertake the reforms needed to restore growth, jobs and prosperity. Without those changes the eurozone countries will continue to trail the growth leaders in Asia, the US, and non-euro members of the EU. It will be associated with poor economic performance, and its credibility will be eroded.

One very strong fact supports it, however. The political commitment to it was so strong that its abandonment would be seen as abject surrender, as well as the abandonment of an ideal. Nobody wants to be seen to be that wrong. This is about politics, not economics.

"Blame is drifting round the Eurosphere like a dark cloud, looking for someone to rain on."

- Christopher Fildes

So that’s it all finished, Inspector?

Yes, Sergeant. They won’t be troubling anyone for quite a few years. One of the biggest criminal gangs we’ve ever nailed.

How did they get away with it for all those years?

Easy. It was an international group of con-men based in France, but with accomplices in places like Belgium and Luxembourg. They even tricked a bunch of Germans into bankrolling their operation.

What put us onto them, Inspector?

We saw that cash was being siphoned off in millions. The unsuspecting marks were being bled white to fund the lavish lifestyles of the French tricksters. We rumbled something was up.

But where did they go wrong?

Like all criminals they got too greedy. They widened their operations to more countries and tried out a whole new scam to lock everyone into their crooked system permanently. But some of the new victims got wise to it and sided with our boys when we confronted them. That’s what finally smashed their operation.

And all because they made just one mistake. They underestimated British determination and our sense of fair play.

They always do, Sarge. They always do.

The Dutch say Nee to the EU constitution, just as the French said Non. The Danes will probably say Nej. along with the Czechs and Poles. The British, given the chance, will do the same. 'No' is rapidly becoming the lingua franca of the European people. 'Yes' is what their leaders say. It is the language of the élite.

Much of Europe (but not Britain) shows a surprising deference to its political class. The top leaders and administrators are given much freer rein to get on with things, subject to occasional displays of popular frustration. The rulers are assumed to know how to run things, while ordinary people generally express low-level grumbles about their leaders' remoteness and get on with their own lives.

The EU constitution, indeed the EU project, is a product of that élite. Its members have more in common with their opposite numbers across Europe than they do with the ordinary people of their own country. They are cultured, with a taste for the arts and a familiarity with abstract ideas. They regard themselves as modern. They present European political union as the wave of the future, and people who oppose it are thought backward.

Their shared values include a scorn for nationalism, and especially for patriotism. In the modern world these are seen as anachronisms. Although they rarely express the thought publicly, many of them see religion in the same light. They laugh at Americans who still profess belief in such things, and think of them as outdated country bumpkins.

Yet even though it is unsophisticated and outdated, that old nationalism proves itself more powerful than the rational structures designed to replace it. People are moved and motivated more by that sense of who they are than by who their betters think they ought to be. The No votes are a warning shot over the bows of élitism. The European people want a structure which expresses their aspirations, rather than one which tells them what to do.

The big French vote against the EU constitution is a reassertion of the nationalism that the EU project was designed to temper. Many in France think the constitution too free market and Anglo-Saxon, just as many in Britain think it too dirigiste and centralist. They oppose it for the same reason, though, rejecting the way it would limit the right of their country to choose its own future, and to express what they see as part of its national character.

The French like their high social benefit economic model, while many in Britain view it as untenable amid global competition. The French went along with the surrenders of sovereignty which the EU project entails because they have seen them, until now, as an extension of French influence. It was other countries which had to yield to the French vision. Now, however, in a Europe of 25 members of diverse character, the French see themselves being required to abandon their traditions and embrace alien values. And they have said no.

As one nation reasserted itself, another nation died. This was the nation of Europe, which was to have been given its own President, Foreign Minister and diplomatic service by that new constitution. With the veto of member states diminished, the new nation would have taken unto itself more of the powers they used to exercise. It would have acquired new authority to direct the lives and laws of its members.

The vision which inspired its supporters was of a nation large enough and powerful enough to stand alongside the continental powers of the USA, Russia, China and India. Those nations, however, shared a culture, a history and a common sense of identity which Europeans do not feel. The European peoples do not feel Europe to be a country, and have been lukewarm or hostile to the attempts of a political élite to turn it into a state.

Europe will continue to change, but as a collection of nations instead of a single, powerful new one. Its members will converge on some issues but will go their own way on others. The failed vision was modeled on what nations had done before, whereas the reality of what now emerges in Europe will be of something new, and probably of more value to its members.

Europe's leaders are 'in profound denial about the grim realities of theglobal marketplace' says businessman and Channel 4 chairman Luke Johnson. While the Chinese work 24-7 to build the modern miracle of China, the EU busies itself trying to stop the Brits working more than 48 hours a week, even if they want to.

China is huge. And super-competitive. For 15 years, its economy has grown 2-3 times faster than the UK's. There has never been such an economic transformation: it has lifted 250m people out of poverty and turned them into economically active competitors for us. It is hard to see what industries we will be left to compete in:

Hamstrung by preposterous regulations, high taxes, a burdensome welfare system and anti-business legislation, how on earth are we to retain our standard of living?

But EU leaders, rather than unshackling our entrepreneurs to stand up against this onslaught, do the opposite. 'They have lost the plot,' says Johnson. 'They are dangerously deluded.'

Like companies going broke, countries slide into recession at first slowly - then violently quickly...I recommend readers to prepare themselves for a rough ride.

In the desk of every chief executive office (second drawer down on the left) sits a brown envelope. When things go badly wrong and there seems to be no way forward for the company, the CEO calls in the other directors and solemnly takes out that envelope. It is marked "Plan B."

The EU constitution requires the assent of all 25 members to be ratified, though in practice it might survive, as previous agreements have, the temporary dissent of a small nation or two. If any of the big countries or founder members of the EU refuse to endorse it, an impasse will be reached. This might happen if France or the Netherlands reject it next week, or if others do so later.

At some point the EU opens the drawer and finds amid general consternation that there is no brown envelope. No Plan B. Indeed, José Manuel Barroso, the commission president, has said that there is none. There is talk of a secret plan if France narrowly rejects the constitution next Sunday. Leaked details suggest that an emergency statement might be issued.

The statement would insist that the constitution, the blueprint for the EU's political future, lives on and that ratification must continue.

This, however, is not a Plan B. It is a commitment to proceed with Plan A even though it has failed. Fortified so long by talk of inevitable progress towards ever closer union, the European Commission cannot conceive of anything else.

Others can, though. A majority in Britain, and several among the northern states and newer members, lean more towards an association grouped together for mutual advantage, lowering barriers to trade and competition because it suits them, but shying away from grandiose dreams of a new super-power to stand against the US as a political, military and economic unit.

In that alternative brown envelope are plans for a rollback of EU regulations, and for a reclamation of judicial powers by member states. While the members will consult and try to co-operate on foreign policy, there will be no EU embassies or European armies. Members will set their own tax policies, and will not be subject to a social model economy which limits enterprise and growth.

The Plan B Europe will almost certainly be richer and more competitive in a global economy. Its members will be directed more by their citizens than by unelected bureaucrats and judges in Brussels. It will probably be a more vibrant, more successful place than Plan A Europe. Either way, we might soon find out.

The May 29th French vote is once again in doubt. Three recent polls are reported to show a small swing towards to 'no' camp. Several observers have expressed doubt about the reliability of the unscrutinized vote in the French Overseas Territories. It was this lop-sided yes vote which secured a win for the Maastricht Treaty despite a majority voting 'no' in metropolitan France. It could happen again to give President Chirac his victory.

The French are in two minds. Opponents say that a yes note will confirm the subjugation of France to the rule of perfidious Albion with its liberal, free-market values. Supporters, including the President, say that, au contraire, a yes vote will embed French social values into the EU at large.

We already know that the UK vote will not be a fair one. Opinion polling showed that the actual wording of the question would influence the result, and the question to be asked was only decided by the government after it had tested the response of focus groups and sample voters.

The selected wording is "Should the United Kingdom approve the treaty establishing a constitution for the European Union?" This option gives the highest likelihood of a yes vote. It looks very much as though this will never be tested, however. Either the French on May 29th, or the Dutch three days later, could save us the trouble.

Laszlo Kovacs, the European commissioner for taxation, has described the flat tax as "absolutely legitimate" (reports Stephen Castle in the Independent). The single flat rate tax, already in use by four EU members and planned or under consideration by many more, has been attacked by the French and others as "social dumping," even though it has actually raised more revenue.

Mr Kovacs, a former Hungarian foreign minister, brings a further fresh breath of Eastern air to the enlarged EU by pointing out that "the EU does not tackle the issue of income and corporate tax rates." This is true, but it must have made Brussels shudder because tax harmonization is among their ambitions.

Flat tax threatens those ambitions. It has spread across the former Socialist economies not because it is only suited to developing countries but because it is politically easier to introduce in transitional economies. The interest groups which benefit from the status quo were less entrenched there. Fortunately the competitive pressure from their success makes it easier to take on those groups in advanced countries.

Flat tax improves things because it lowers tax rates, and because it is simpler, and easier to understand and administer. It also brings the chance to sweep away all of the quirks and complexities which have disfigured tax codes over the years. Now that is "absolutely legitimate."

Questions are being raised not only about the strength of the euro, but about its viability. A report by the US investment bank Morgan Stanley suggests that the currency might not survive forthcoming hazards. The study, Euro at Risk, (reported by Ambrose Evans-Pritchard) warns that:

the financial markets are becoming alert to the risks from rising protectionism in Germany, a breakdown of EU fiscal discipline, and a likely rejection of the European constitution by France and Holland.

Joachim Fels, Morgan Stanley's eurozone economist, doubts if the newly enlarged EU will ever move to full political union, and thinks the single currency itself is at risk. He cites

the death of the EU services directive and Germany's recourse to wage protectionism to stymie the competitive challenge from Eastern Europe as evidence that integration might now go into reverse.

The study talks of "lethal implications" to the emasculation of the Stability and Growth Pact, which was likely to open the fiscal floodgates. The end result, the study suggests, might be the demise of the euro and the re-emergence of national currencies.

It all seems a long way from the currency which was supposed to replace the dollar as the world’s reserve currency, and to weld the EU nations into a political unit. We live in exciting times.

A reader writes:

Which side do I support in the French referendum on the constitution? It would be nice to watch the faces of the unelected Eurocrats after a 'no' vote from France. It would deliver a swift uppercut to the dirigiste, top-down federalist vision. On the other hand, a 'yes' vote would be sweet if the French thought it forced them into an Anglo-Saxon liberalism, with free trade and free markets, which they seem to detest. Which side should I back?

The ASI replies: "A 'no' vote might be more fun, in that it would cause a heart-searching re-evaluation within both the EU and France itself, as each had to re-think its future. It might be fun, too, to watch pro-Europeans in Britain trying to insist that a politically united Europe was still 'inevitable,' and to handle the fact that the Euro-train which we could not afford to miss was now a tangled mass of scrap metal. And the clang as Chirac's smile dropped to the floor might make a sweet sound.

While we could, as you say, hail a 'yes' vote as the final triumph of perfidious Albion with its heartless Anglo-American economic model, the future will probably force that upon them whatever happens on May 29th.”

On the face of it, Marks & Spencer has won a victory. Advocate General, Miguel Poiares Maduro at the European Court of Justice has said the UK Treasury was wrong to stop M&S offsetting tax losses in EU countries against its UK liability. The Exchequer could lose £30m this time, but billions more as others drive through the opening. Good news or bad?

The Telegraph’s City Comment suggests that "if a company can aggregate its EU income for tax purposes, it's likely to choose to do so in a country where the rates are low." This might give companies more flexibility, but EU treasuries rather less.

On the other hand the Times Business Editor's Commentary (second item) identifies this as a way in which "tax harmonization will creep in across the EU the back way and slam the door behind it." There seems little prospect that any European harmonization would be downwards. The editor suggests:

If EU taxes are harmonized by law they will be high. If they are harmonized by competition, they will be low.

In fact the ruling was couched about with terms which would allow national treasuries to drive around it, while another ECJ opinion came out for EU rules against anti-tax-avoidance measures. To save firms from burdensome Treasury rules is no gain if they are thereby subjected to the tax regime favoured by EU officials. Beware of lawyers, especially European ones, bearing gifts.

We should spare a sympathetic thought this Easter for Jacques Chirac. The French president is facing several unpleasant facts. One of these is that the EU is no longer a projection of France, or a vehicle for enlarging French influence in the world. The addition of new members has diluted not only French voting power, but French influence. Not only is French no longer the main language of the EU at official level, but French policy no longer prevails as it once did.

In a recent speech M Chirac railed against 'ultra-liberalism' as "the communism of our age." His problem is not that globalization threatens French farmers and manufacturers with cheaper goods from China and India, but that the new Eastern EU members threaten them from inside the EU. The barbarians are already inside the gates.

The EU Services Directive, the target for much of his apoplexy, offers the prospect of a vast internal EU market in services as well as goods, pretty much as was intended and promised. France, backed by Germany, both with unemployment levels in excess of 10%, is alarmed at the prospect of Polish plumbers and architects competing with French ones. M Chirac claims to have had the directive withdrawn, but Tony Blair disputes this, and points out that qualified majority voting will decide it, with unanimity not needed.

President Chirac needs to persuade his voters that France still pulls the EU strings, or their May 29th referendum may vote down the EU constitution. The latest polls show the 'no' majority increasing, but not yet to a level that time and EU spending cannot put right. All the same, if it goes down it will confirm that the French dream of a united EU, led by France, standing up both economically and politically to the USA, has faded. And it will have been internal, not external, forces which dispelled it.