In the mid-1990s, around the time when the European Union was seriously getting to grips with creating the euro zone project, the Reuters bureau in Brussels received a call from a British analyst working for a US bank. The London-based currency specialist had seen EU leaders taking a series of concrete steps towards a shared currency. His question.
"This isn't really going to happen, is it?" That incredulity underlines the divide that existed then - and still does - between continental politicians seriously embarked on establishing a pan-European currency and many financiers who can't believe such a thing can work economically.
Sceptics are currently enjoying a "told-you-so" moment, watching the euro zone's indebted weaker states being hammered by market forces, unable to devalue their way out of debt trouble or to improve their lagging competitiveness. Greece and Ireland have already been forced to seek bailouts for their over-extended debt by markets persuaded that things cannot stay as they are. There promises to be more volatility in the new year.
The europhiles, meanwhile, are adamant that all is well politically and that, slow-moving EU politics aside, when push comes to shove the European Central Bank and the big countries such Germany have the wherewithal and desire to fix things.
The competing views were summed up recently by Percival Stanion, head of allocation at London-based Baring Asset Management, and Holger Schmieding, chief economist at German private bank Berenberg. Stanion: "We think it is very likely that it (the euro zone) will fall apart ... I think the likelihood of a failure of the euro is quite high." Schmieding: "Outside the euro zone, the political resolve to keep the euro zone together is completely underestimated. It is about the future of integration."
CHASING TAILS This division between economics and politics is reminiscent of the Exchange Rate Mechanism (ERM) crisis of 1993, when markets pushed European currencies to the edge and out of the narrow trading bands that had been set up ahead of the euro. There was huge turmoil and cost - and plenty of money to be made for investors on the right side of the trade - but in the event, it was ended by a political fudge, the widening of the bands to an almost meaningless range.
Now the markets are on a similar roll, moving from Greece and Ireland to Portugal, Spain and possibly elsewhere. That this assault is to a certain extent self-fulfilling was writ large last week by Moody's Investor Service. The ratings agency put Portuguese debt on review for a possible downgrade, citing as one reason concerns about the country's ability to access capital markets at a sustainable interest rate.
But it added: "Portugal's solvency is not in question." In effect this was saying that Portugal is pretty sound but has some problems, one of which is that financial markets are treating it as if it is not sound. William De Vijlder, chief investment officer of France's BNP Paribas Investment Partners, has looked at this phenomenon on his blog, dubbing it "Individual rationality, collective irrationality".
The idea is that most governments and authorities are doing what is needed to stem the euro zone's problems - austerity programmes and the like - but that this takes time, while markets are notoriously short-term and relish a crisis. It is as if, he writes, "A fire broke out in a room full of people, and many were trampled to death because some had suggested that panic would spread if the candles used as lighting fell over."
GERMANY BECKONS As with the ERM crisis, the broad expectation, especially in the euro zone itself, is that the various authorities will eventually act to shore up the indebted countries in a way that will make it too risky for markets to put on pressure. You only have to ask whether anyone - from Germany to Greece - would be better off without the euro zone.
The former would lose the advantage of a shared currency with its major trading partners; the latter would be cut loose from whatever discipline being in the euro zone gives it, sending it back to emerging market obscurity. But there are differences between the ERM days and now, which may undermine, or at least weaken, the argument that politics will triumph over economic scepticism.
The drivers behind European integration are not what they were. For one, Angela Merkel, Germany's chancellor, does not project the same zeal as her 1990s predecessor Helmut Kohl for building the single European house. Germany, it has been suggested, may even be more interested in economically booming China today than it is in Europe.
And while it was hard for Germany to merge its strong mark currency with less robust counterparts, this sacrifice could pale in comparison with the potential cost of bailing out the euro zone in the same way as it did East Germany. The economic view tends to be that if it comes to the crunch, the German people will not be willing to bail out recalcitrant nations outside their borders. Many of those who assume a political bailout will be forthcoming admit that the drive has weakened. But they still say that Germany and other major euro zone powers will not let the euro fail.
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