EMU policies are pushing Southern Europe into systemic political crisis

This is what happened to Britain during the ERM crisis of 1992, the trial run for the monetary union.

German reunification was an "asymmetric shock", setting off a boom that compelled the Bundesbank to tighten the screw again and again, and forcing the Bank of England to follow suit at a time when the UK housing bust was already underway.

Spain is about to relive the experience, for Germany is going through another such shock. This one is caused by surging exports to the BRICs -- machinery, luxury cars, aircraft, medical kit, and chemicals. German exports to China rose 40pc last year, and 42pc to Russia.

Oddly, perhaps, I am not seriously worried about Ireland. It has a dynamic manufacturing and export service base, and can hope to export its way back to health. The fact that Ireland has required an EU-IMF rescue should not be misread as evidence that it is in worse shape than several others. Banking busts are desperate but not serious, as the saying goes.

The less open economies of Greece, Spain, and Portugal will find it more of a struggle to recover. The IMF says Portugal’s current account deficit will still be 9.2pc of GDP this year (and 8.4pc in 2015, if it is possible to defy gravity for so long), Greece will be 7.7pc, and Spain 4.8pc.

That these deficits should be so high two or three years into a slump shows how hard it will be to turn this crisis around. Meanwhile, The Netherlands will have a surplus of 6.8pc, and Germany 5.8pc.

The structural misalignment is grotesque, like the perma-divide between Italy’s North and South but without the vast annual subsidies that stops it blowing up.

A full 140 years after the Two Sicilies were gobbled up into Cavour’s lira zone, convergence has not occurred. The Bourbons might have done better.

Already reeling, the indebted European periphery must now brace for a fresh shock as the European Central Bank tightens monetary policy to stop Germany from over-heating.

One-year Euribor rates used to price Spanish mortgages have been creeping up for months, and jumped to 1.54pc after Jean-Claude Trichet turned seriously hawkish on inflation last week. It may go much higher very fast if the ECB starts to raise rates by the middle of this year.

This will not help clear a four-year backlog of unsold homes in Spain, which is no doubt why Madrid is pushing for a capital injection of up to €80bn into the smaller banks and cajas – by partial nationalization if necessary.

The central bank said in November that the banks have €181bn (£153bn) of "potentially problematic" loans to the real estate sector, or 17pc of GDP.

Mr Trichet’s fire-breathing rhetoric can be taken as a signal that the ECB will continue to run monetary policy for German needs and tastes, refusing to accommodate a little slippage on inflation to let Club Med regain lost competitiveness without having to endure the agony of debt-deflation. Indeed, the ECB seems to have picked up some of the worst habits of its mentor.

Mr Trichet is no doubt in an impossible position because the German people gave up the D-Mark under an implicit and sacred contract that EMU should never lead to inflation in their country. Should it ever do so, acquiescence in the whole project comes into question.

Yet Mr Trichet's comments on Thursday were astonishing. He cited the ECB’s rate rise in July 2008 with approval – and as a warning -- as if this monetary Charge of the Light Brigade had been vindicated by events. Most economists viewed that decision as best forgotten.

We now know that large parts of the eurozone were already in recession by then, that the commodity spike was burning itself out, that ECB rhetoric had set off a destructive dollar rout and pushed the euro to ruinous highs of $1.60, and that the foundations of the credit system were already crumbling.

A paper by the Richmond Fed suggests that ECB’s action was a key trigger of the global crisis.

The ECB is now itching to tighten again, this time because of a temporary jump in headline inflation to 2.2pc, caused by rising oil and food prices. No matter that M3 supply growth in the eurozone is anaemic at 1.9pc.

Real M1 deposits have contracted at a rate of 2.8pc over the last six months in the quintet of Italy, Spain, Greece, Ireland and Portugal.

"This is comparable with the decline in early 2008 just ahead of the plunge into recession," said Simon Ward from Henderson Global Investors.

The ECB has passed the eurozone debt parcel back to EMU governments, deeming it the proper responsibility of fiscal authorities to sort out the mess.

So be it. Since the only government that seems to matter in our new German Europe is in Berlin, the parcel has in reality been handed to Chancellor Angela Merkel.

She has two viable options. She can choose to save monetary union, first by doubling the size of the EU bail-out fund and halve the interest rate charged so that the debt-stricken states can recover; and then by acquiescing in fiscal federalism and a pooling of debts -- what McKinsey’s chief in Germany calls a "spiral into a Transferunion" – entailing a regime of subsidies for years to come.

That is to say, Germany must be prepared to do for Southern European what it has already done for its own kin in East Germany, but on six times the scale.

Or she can pull the plug, by quietly signalling to the Verfassungsgericht that Berlin would not be too angry if the eight judges declared the EU’s rescue machinery to be unconstitutional, ending EMU as we know it.

What is clear is that status quo is ruinous. The slow suffocation of nations still under Fascist rule just one generation ago cannot end well for liberal democracy in Europe.

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