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What happens now? Nobody is talking about an EU break-up, but there is plenty of speculation, touched on here last week, about the euro. A report last week that Germany’s finance minister and Bundesbank (central bank) president have discussed its demise was swiftly played down but that did not kill the idea of a break-up. Stern, the German magazine that reported the discussion, says the euro is making the Federal Republic’s economy “kaputt”; no translation needed.

Stuart Thomson, an economist with Charles Stanley Sutherlands, the stockbroker, says in a paper that the French referendum was the beginning of the end for the euro. The collapse of monetary union is inevitable by 2020, he writes, as the European economy comes under increasing pressure, not least from its ageing population. But he also sees a 50% probability of a partial break-up by 2008, with one or more member states withdrawing, partly as a consequence of the currency- market backlash as China and Japan abandon their policy of supporting the dollar through large-scale purchases of US government bonds.

History is on his side. Every previous monetary union in Europe, such as the Latin Monetary Union of 1865-1927, ended in failure.

There is a difference between a “no” vote on the constitution by EU citizens and a “yes” to the collapse of monetary union. But the constitution votes by the French and Dutch show that support for the European project is thin and that people’s willingness to make economic sacrifices for what used to be seen as the greater good of EU integration is limited.

The music is coming to a close and the euro isn’t singing any more.

PS: Grim, that’s the only way to describe the data coming out of Britain at the moment. The purchasing managers’ index suggests that UK manufacturing is contracting at a faster rate than it is in Europe. The CBI says retailing remained depressed last month, while the retail traffic index from consultants SPSL showed barely any improvement in May from April’s extremely subdued levels, despite two bank holidays during the month.

Financial markets are picking up the shift from worries about inflation to concerns about growth. The US 10-year bond yield dropped below the symbolic 4% level last week.

The monetary policy committee will meet this week to consider what to do about this slowdown. It will be the last meeting for Marian Bell, who has been a quiet but sensibly dovish MPC member, before her replacement by David Walton of Goldman Sachs. A “no change” verdict this week looks assured, but how long before the first cut? The money markets, having thought the Bank would hold off any move until November, are now starting to focus on the possibility of an August cut, which would be exactly a year after the MPC’s last hike. It depends, as always, on the data. The committee will take a bit of shifting but if the figures continue as weak as they have been in the past few weeks, the markets may well be right.

Finally, thanks to the many people who pointed out a slip of the pen and an inversion of the euro-sterling rate in last week’s story on the single currency and the referendum votes. The euro, to put things straight, has fallen in the past few days from just below £0.69 to just above £0.67.

Explore Economics

• Pre-Budget Report 2009

• Budget 2009

• World Economic Forum

• The Times MPC

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