And the walls came tumbling down… (not)

There can have be few more assiduous euro-watchers than Ambrose Evans-Pritchard, of The Daily Telegraph, and still fewer who have been more meticulous in charting the fall and fall of the great single currency project.

His latest offering, in the business section of the Telegraph details how the "Eurozone's growth 'is grinding to a halt'", retailing a report by HSBC that claims the eurozone is sliding towards a Japanese-style "liquidity trap" and may have trouble holding monetary union together unless the EU authorities take prompt action.

The bank says that Germany is perilously close to deflation and it believes it is only a question of time before there are generalised price falls in the country. This will in turn raise more questions about the rules governing EMU and the sustainability of the single currency itself. Netherlands and Italy were also in danger.

Italy, currently competing for the "number one basket case" slot of the eurozone, is in "dire straits" after a "collapse" in productivity and negative growth for five out of the past nine quarters. "Italy has completely failed to adapt to the rigours of the fixed exchange rate," the bank says.

Its forecast is for 1.1 percent eurozone growth in 2005, but it warns that the zone may tip into recession as the global trade cycle turns down. Germany's exports to China are already falling. Furthermore, its warning comes as fresh data show a 3.9 percent fall in Italian retail sales in April, the worst monthly drop since records began.

According to Ambrose, the dreaded term "liquidity trap" was used by economist John Maynard Keynes in the 1930s when traumatised consumers and investors refused to spend, pushing prices ever lower. Deflation renders conventional monetary policy impotent as it is impossible to cut interest rates below zero (though there are other methods). Inflation-adjusted rates rise as the crisis deepens, causing mass bankruptcy.

Germany and Holland may now be slipping into this trap. Their core inflation is around 0.7pc, but on a downward glide path. The ECB's one-size-fits-all interest rate, stuck at 2pc as the bank still struggles to cool property booms in Spain, Greece, Ireland, and parts of France, is effectively driving Germany - and Holland - deeper into slump. Deflation is hard to stop once it becomes lodged in the system. Japan is now in its eight year of falling prices despite zero interest rates for much of the period.

Peter Wandesforde, HSBC's chief European economist, said the weaker euro has helped put off the day of reckoning. "We're not looking at the doomsday scenario quite yet: but it is a question of when, not if," he says.

Gazing at the crystal ball, however – even though it still has not had its 5,000 mile service – one cannot help but wonder whether this is not the opportunity that the "colleagues" have been waiting for. So far, the euro has led a charmed life, with the eurozone avoiding any major economic crisis. One is surely overdue.

But, as we have all observed, rather than being knocked back by crises, the EU seems to thrive on them. In fact, it was in 1975 that a Study Group on "Economic and Monetary Union 1980" observed that crises could be "the occasion of progress, by provoking a crystallisation of latent wills." "Great things are almost always done in crises," it observed, an early exposition of the doctrine we have come to know as the "beneficial crisis".

Famously, Prodi once exclaimed that the growth and stability pact was "stupid" but the context of his remark has been much misinterpreted. He was railing not so much against the pact itself, as at the inability of the commission to enforce it – the lack of a so-called economic government. Even as he left office as EU commission president, he bemoaned the its lack.

Thus, if in the near further, the eurozone does suffer a massive economic crisis, there may be many of the colleagues who welcome it as an opportunity to "crystallise latent wills" in order to launch the next major wave of integration.

After all, it was Monnet who so wanted a "Finance Common Market" leading to European economic unity. "Only then," he argued, "would… the mutual commitments make it fairly easy to produce the political union which is the goal." The lack of a European economic government remains a major stumbling block in the achievement of that goal and, as Blair said only recently, "In every crisis there is an opportunity." That might have been Monnet speaking.