Jonah, further to our earlier exchange on the common european millstone (er, currency), there was a terrific analysis in (strangely) the FT yesterday by Wolfgang Munchau. Registration required, but here are some key points:

Against the rest of the world, the eurozone runs a negligible current account deficit. But inside the eurozone, huge internal imbalances have built up. One measure of imbalances is the current account. Spain is heading for a current account deficit of close to 10 per cent of gross domestic product. Western Germany’s current account surplus is approaching 9 per cent of GDP. The history behind these numbers is largely undisputed. Germany has regained the competitiveness it lost after unification. More interesting is how Germany’s relative competitiveness will evolve in the future. The consensus is that Germany will eventually lose some or all of those gains and balance will be restored. That assumption is quite wrong. On present evidence, the competitiveness gap is still likely to widen in Germany’s favour, albeit not at the same pace.

The way that has happened, writes Munchau, has been that German workers have (effectively lowered) the cost of their labour. “According to the European Commission’s latest report on the eurozone, the wage share in GDP has fallen from just under 62 per cent in 1991 to about 57 per cent in 2005, mostly due to wage pressures inside Germany. In the US, it has remained comfortably above 60 per cent throughout this period.” As one commentator noted it would have been far better (for Germans) if they had achieved this improvement through efficiency gains, but there we are.

The real question now (as Munchau notes) is what the EU’s ‘southern’ economies are to do to restore their competitiveness. Their reformers are, he explains, “against big domestic political opposition in their effort to restore their economies’ competitiveness inside the eurozone. They are also up against a moving target. This is why the build-up of internal imbalances is such a serious issue.”

Absolutely right. And the core of the problem remains (as it has always been) that the Euro was a political project, not an economic one, and a project, what’s more, without an ounce of democratic legitimacy, which brings us back to what Kaletsky was saying….

As one well-known investment manager e-mailed me this morning, “It’s only a matter of time.”