European Central Bank calls for 'quantum leap'

"You haven't held onto a few million lire, have you, just in case?"

Lorenzo Bini Smaghi, the Italian economist and member of the executive board of the European Central Bank (ECB), who has been a key figure in the crisis surrounding the euro, laughs at my mischievous suggestion that he might be ready for a switch from the euro back to national currencies.

"No, not at all," he answers. "You hear rumours of bank notes being reprinted," he admits, but he insists that "the euro is a common destiny."

It is a light-hearted way to make a very serious point.

The crisis facing the European single currency is by far the deepest in its short history.

Some are questioning its survival - or at least the survival of the current eurozone membership, including crisis-hit Greece.

Until a few months ago, central bankers like Mr Bini Smaghi, sitting in his office high up in the ECB's Eurotower headquarters in Frankfurt, would not have thought such questions even worth discussing.

'Biggest crisis'

The euro, launched in 2002, was indeed seen as a matter of "destiny", an irreversible part of ever-closer European union.

But now it has been caught up in the global economic turmoil. And Mr Bini Smaghi agreed to see me to discuss its future.

"We are facing", he says, "the biggest crisis since World War II. I think nobody could foresee that".

And the euro has particular problems too, which the crisis has exposed.

It was, he concedes, "an experiment".

"It would have been very difficult to design this perfectly."

What the crisis has revealed is the difficulty of running a monetary union without a full political union behind it.

The euro crisis came to a head in May, when possible Greek default led to fears of banking panic and state bankruptcy spreading to larger countries such as Spain. For weeks, eurozone leaders appeared unable or unwilling to do anything.

Now a new emergency fund has been created, with IMF help, to try, as Mr Bini Smaghi puts it, "to prevent a repetition of the Greek case", so that when a problem occurs "it remains circumscribed to the country itself".

The great fear for richer eurozone members is that the single currency has left them so interconnected that, as bad debts and banking crises spread, they will be liable for ever larger bail-outs.

'Nightmare'

Daniel Gros, influential director of the Centre for European Policy Studies in Brussels, says the focus is now firmly on Spain and its potential banking losses.

"Will it be 50 billion (euros) or five hundred? At present nobody knows."

That kind of uncertainty is especially scary for Germany, the eurozone's financial anchor. Germans are already appalled at what they see as Greek deception in the way the country has run its finances.

Lorenzo Bini Smaghi senses the anger rumbling on the streets of Frankfurt far below his office.

"I think it is an idea that people are talking [about]. Why doesn't Greece get out of the euro? It's very instinctive. Why should we pay for Greece?"

Continue reading the main story “ Start Quote I think we will be looking back at this as a message that economics always triumph over politics” End Quote David Marsh Banker and euro historian

Some suggest Greece should be expelled from the euro.

Others wonder whether, faced by harsh austerity measures imposed by the eurozone and IMF, it might decide to reissue its own currency, hoping to boost its room for economic manoeuvre.

But Mr Bini Smaghi warns that leaving the euro would be "a nightmare". All financial contracts would have to be renegotiated, he suggests, and international law would insist on payment according to their value in euros, not in a devalued new currency.

"It would be devastating for a country," he concludes. "I think it's much better in the end to stick by the rules."

But those rules within the eurozone are about to become far stricter as to how members run their economies.

For if the euro is to survive in its present form, Germany in particular will insist on a far tougher approach.

'Quantum leap'

Many Germans are nostalgic for their old currency, the deutschmark, a symbol of West Germany's post-war "economic miracle".

I even found such nostalgia on display in the souvenir shop on the ground floor of the ECB in Frankfurt.

It sells gold-plated mementos of the old mark, with a sentimental inscription - "You were worth gold to us".

Nor are Germans impressed with the ECB as replacement for the German Bundesbank, famous for defending the value of the deutschmark against all comers.

Continue reading the main story BBC Radio 4: Analysis Listen to Chris Bowlby's full report on Analysis on BBC Radio 4 on Monday, 5 July at 2000 BST

Old German angst about currency collapse was revived by the ECB's buying of Greek government debt officially classified a "junk".

"That for the Germans is almost like the death knell of the euro," says David Marsh, banker and author of a history of the single currency.

The single currency, he believes, will not last the next decade. "I think we will be looking back at this as a message that economics always triumph over politics."

For Lorenzo Bini Smaghi of the ECB, however, euro members now need a "quantum leap" in integration, accepting they are in a "political union" that will hold them together.

Until now, he concedes, some didn't realise how deep are "the interactions with other countries that result out of sharing the same currency".

As potential bills mount, and richer countries demand tougher austerity rules while poorer eurozone countries face spending cuts and rising unemployment, the political strength of the single currency is about to be tested as never before.

You can listen to the full report on BBC Radio 4's Analysis on Monday, 5 July 2010 at 2000 BST and on Sunday, 11 July at 2130 BST. You can subscribe to the Analysis Podcast or listen again on the BBC iPlayer