Expert View: A European constitution? We're not in any fit state

"You need to read The Voyage of the Damned - you wouldn't set foot in Rome." Knowing Wall Street bankers' limited reading habits, I assumed I had just lost another friend to Jesus and this must be some uplifting text on Italian morals. But no, the market has become fixated in the past week with the prospect of a break-up of European political and monetary union. The Voyage is suddenly the text du jour.

"You need to read The Voyage of the Damned - you wouldn't set foot in Rome." Knowing Wall Street bankers' limited reading habits, I assumed I had just lost another friend to Jesus and this must be some uplifting text on Italian morals. But no, the market has become fixated in the past week with the prospect of a break-up of European political and monetary union. The Voyage is suddenly the text du jour.

The crisis starts today in some scenarios, with the French voting "no" on the new European constitution. Just why the French have to vote at all, and as a result the whole of Europe, seems to be to do with President Chirac's domestic political calculations. Damn him. Why should every member state have to give approval? Can you imagine the chance of success if the American constitution were put to a similar test? If France votes "no", you might well ask "so what?". Presumably Europe could just carry on with the old constitution and nothing would happen.

But the problem is that underlying this political discord and failure of leadership is a more serious economic discord. Continental Europe is in danger of falling back into recession - a point recognised last week by no less a body than the OECD, which spoke on Tuesday of "the risk that an accident will happen" and called for an urgent cut in European interest rates.

Jean-Claude Trichet, the president of the European Central Bank, remains unimpressed - arguing that member states are already using too much fiscal stimulus and that adding a monetary push would be like throwing petrol on the inflationary bonfire.

Here is where The Voyage of the Damned comes in. In this analysis by Bernard Connolly of Banque AIG, it is argued that Italy is destined to be kicked out of the euro as the structural imbalances in its economy reach breaking point. Italy is certainly in trouble: the OECD estimates that, stripping out some special accounting, the budget deficit will be 4.5 per cent this year and 5.1 per cent in 2006.

The euro bears argue that the only way out of this is for Italy to split from the union and engage in a huge devaluation of the reborn lira. A remembrance of things past.

Which is why, as a pro-European, I rather hope the French do vote "no". That's partly because a shock like that is needed for Europe's political institutions to reform, and only be allowed to return to the ballot with a slimmed-down constitution and a better-balanced budget. But it's more because we do need this crisis to come to a head for many continental Europeans to recognise the social adjustments that are necessary if Europe is to remain competitive. Look at the behaviour of markets last week as it seemed possible that Angela Merkel would replace Gerhard Schr?der as Chancellor. German markets rallied to the bizarre cry of "at last our Mrs Thatcher".

Unfortunately, this is not going to be easy. Look at another basket case, Portugal, whose budget deficit is heading for 6.8 per cent this year (3 per cent is the official limit in the EU's stability and growth pact). To its credit, the government announced a series of tough measures on Wednesday: VAT will rise to 21 per cent, income tax to 42 per cent and the retirement age from 60 to 65. This is the kind of medicine many countries need to take. Will they?

In a room at the palazzo where his family have lived for 800 years, the youthful scion of one of the great Italian families looks at me with ancient eyes when I ask him if Italy is ruined. Gesturing to the Botticelli above his TV set, he observes '"It will take a lot to ruin this country."

I just hope the markets don't try.

christopher.walker@tiscali.co.uk