That conflict between political visions and actual economics:
What if monetarists are right and German headline inflation - currently at a euro-era high of 6pc - proves stubbornly persistent?
Germany faced this level of inflation during the Reunification boom of the early 1990s. The Bundesbank crushed it by raising rates 500 basis points to 8.75pc, and in the process blasted sterling out of the Exchange Rate Mechanism, with potent political consequences for Britain’s relations with Europe.
This time the ECB is persisting with negative rates even as Germany hits full employment and full capacity, and even as the ECB’s own staff union demands a 5pc pay rise.
The central bank is continuing to soak up eurozone budget deficits with QE bond purchases on a vast scale, essentially shielding a string of insolvent Club Med states from market forces under scarcely-disguised “fiscal dominance”.
Leave aside all of the details here - exclude even Germany, Brexit, the Olive Line and all that from your thoughts. Observe instead that we have a clash here.
There’s a political idea - again, what exactly it is isn’t the point - which says that Europe should be united like a country, countries have the one currency, there should therefore be the euro.
There’s the economic reality which is that Europe isn’t an optimal currency area. Note that “optimal” here already means taking into account ease of trade in one currency, as against the problems of one monetary policy for disparate economies etc.
That clash produced that bouncing of Britain out of the ERM. Germany needed, and got, different monetary conditions than the UK so the FX peg could not be held. Later, Germany needed laxer conditions than some of the periphery countries needed - thus Ireland and Spain’s property booms. Then again conditions differed and Greece needed - and, and, and.
Just to emphasise again. This is not about the political dreams themselves, whether that united Europe is a good idea or not. Clearly, we have views but that’s not what we’re on about here.
Rather, there’s a clear attempt to impose a political dream upon reality. Further, it’s not really working. Working in the sense that the economy can do its job of making the average person better off over time. That hasn’t been true of Italy for three decades now, just as an example.
Which brings us to the point we do want to make. There are many political dreams out there. There is also economic reality. In a clash between the two it’s the economics that wins out - as reality always does against dreams.
Which is what our recommendation for the New Year would be. Try to make sure that your political dreams are in fact things that accord with that economic reality.