NOBODY SHOULD be surprised that Europe’s politicians are in denial after their referendum defeats. Politicians are usually slow to understand truly historic events, especially when they involve economics. Remember John Major after Black Wednesday: Britain had not been ejected but “temporarily suspended” from the ERM? Politicians often behave like bad actors who find it impossibly difficult to deviate from their prepared and rehearsed scripts, even when the theatre is on fire.

Anyway, why should we care what Europe’s leaders are thinking? After all, Gerhard Schröder and Jacques Chirac are finished and so, presumably, is their concept of Europe. This may be true, but there is one important leader who still has a decent chance of re-election and who, significantly, has found a new catch-phrase: “It’s the euro, stupid.”

The idea that the euro is mainly responsible for the breakdown of Europe has recently been floated by so many Italian politicians allied to Silvio Berlusconi that it is losing what Richard Nixon used to call “deniability”. The anti-euro claims are partly designed to shift blame for Italy’s problems on to Romano Prodi, the former Commission President who is now Berlusconi’s main political opponent. But more importantly, the anti-euro rhetoric is weakening the euro on the foreign exchanges and may well force a change in policy regime at the European Central Bank. These are exactly the right objectives for Europe’s politicians — and they bring me back to the comparison between Britain after Black Wednesday and Europe today.

The first lesson of White Wednesday (as I have always perversely called this day of national salvation) was that a country that gives up its currency loses control of its economic destiny. The second lesson was that interest rates, used boldly, are a uniquely powerful tool for stimulating job creation and growth.

These lessons are hugely relevant to Europe today. The euro is the essential cause of Europe’s “democratic deficit” because it prevents different countries adopting the variety of social and business models that voters demand. A currency is to national economic management what a border is to political sovereignty: with floating currencies each country can choose its own style of economic and social organisation; with fixed currencies they can’t.

If France or Italy wants a generous social safety net, it can keep its business costs down by devaluing its currency. Of course, devaluation may lower living standards for consumers, but if people want to pay this price to preserve their social traditions, that is what democracy is for. It is only when a country with high social costs loses control of its currency that the burden becomes intolerable, destroying jobs and decimating investment.

This is exactly what has happened in the eurozone since 2001. After 9/11 and the Iraq war the euro began to rise for essentially non-economic reasons. Unable to control this currency upsurge, national politicians had only two other options: either to dismantle their costly social provision (a concept which French voters have clearly rejected) or to cut hourly wages (a policy which Germany has attempted, with beneficial results for profits but disastrous effects on consumer confidence and the Government’s popularity).

If the euro did not exist, European politicians would not be driven to such desperate, even suicidal, measures. Each country could make its decisions about the balance between social protection, wages and currency strength.

Since European voters are unwilling to accept wage cuts or abandon their social model, the rational choice is for the eurozone as a whole to adopt the policies that worked so successfully for Britain (and to a lesser extent in Italy) after White Wednesday: to devalue the euro and stimulate growth by slashing interest rates to 1 per cent or less.

This “White Wednesday policy” would almost certainly create a strong cyclical recovery lasting a few years — enough time to conduct a serious debate on the balance that Europe really wants to strike between wages, social protection and living standards.

There is, however, a practical objection to this logical response to the wishes of European voters. Eurozone monetary policy is controlled by central bankers, not politicians. And why should the ECB co-operate with a democratic approach?

The polite answer is that the ECB is first and foremost a European institution, run largely by former civil servants and former politicians with strong personal commitments to the ideal of “ever-closer union”, which is now under threat. Indeed, Jean-Claude Trichet, the quintessential French énarque who is currently ECB President, has already started to hint at the possibility of rate cuts, having said the opposite only two weeks ago.

But what if M Trichet and his colleagues were simply too obstinate for the intellectual Gestalt-shift which White Wednesday brought to the UK? Europe’s politicians could obviously call for their resignation and remove their independence when the European treaties are rewritten, but they could also try a tougher approach.

The ECB is legally charged to “support the general economic policies in the European Community, with a view to contributing to the achievement of the objectives of the Community”, including a “high level of employment” and “sustainable, non-inflationary growth”. If M Trichet and his colleagues refuse to act in accordance with this law, their attention could be drawn to the following news item which appeared last week in Singapore’s Business Times:

“A Thai court has fined a former central bank governor, Rerngchai Marakanond, 186 billion baht ($4.6 billion). The ruling, which effectively pinned the blame for starting Asia’s 1997/98 crisis on one man, found Rerngchai guilty of gross negligence. Now he could lose everything he owns.”

Might this approach appeal to Sr Berlusconi? Europe’s politicians may be incompetent and self-deluding; its central bankers may be arrogant and narrow-minded. But as Dr Johnson said, when a man is about to be hanged, it concentrates his mind wonderfully.

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