I met a small businessman during the week whose business is down by a third this year. He used to have a business with an annual turnover of €1 million in 2008 and 2009.This year, turnover is down to €650,000.

So he is slashing prices and doing deals to stay afloat. He is optimistic that he can survive, if this is as bad as it gets. If there is another slump next year, he’s gone.

He also told me that one of his main landlords was his local council, which owned a site he used for storage. His business needs this land, which is not being used for anything else and is only useful for surface storage of machinery.

So his turnover has slumped, his prices have been slashed and his margin has evaporated, but the council still put up his rent this year. He went to the council, and explained that he was barely surviving and couldn’t pay.

The council responded by saying it didn’t care and it also had to survive. He made the point that, if he went bust, the council would get nothing, because there was no other business around to take up their land. The council acknowledged this, but said that, based on previous years’ margins, he could easily afford this.

In short, the civil servants concluded that, if he was still in business, he was wealthy enough to pay the extra rent. For them, there are only two states of private business: either you are open, in which case they can saddle you with any bill, or you are closed, in which case they will find someone else to pay the money.

The problem is that both sides are hurting. The council has seen its money dry up. The cash it was getting from planning applications, rezoning and the like is gone, so it needs to get cash somewhere else. It sees the businessman as a revenue source, rather than a wealth generator.

For the businessman, his business is down, his overdraft has been cut and his working capital is now his diminished cashflow. He is facing austerity, combined with a credit crunch and a rent hike. He sees the council as a bloated government organisation that needs to give him a break.

This is what austerity looks like in a hard currency system, and it is by joining up the dots, from bottom to top, that we see why our current obsession with the euro is killing us.

The euro limits the amount of credit in the country and forces deflation. But, without credit and inflation, the inherited debts will grind us all down.

When you have disparate countries in a currency union, you get huge variations in demand. In the good times, too much money flows in, creating the illusion of wealth. This creates expectations of inflation, so people front-load their spending to catch up with a moving target.

In bad times, too much money flows back out, creating the reality of stagnation.

This creates deflation where prices are falling, so people postpone spending and hold back. When you can’t print your own money in a deep downturn, the recession gets worse. It also goes on for longer than necessary.

The businessman in the above case goes bust – and, ultimately, so too will the council. Having squeezed all it can out of the businessman, it must turn to someone else or cut back dramatically. So taxes are raised. But the more taxes that are raised, the more the people who have money take their money offshore. We saw this classic behaviour in Ireland in the 1980s and 1990s with deposit interest retention tax (Dirt).

If we don’t do a deal between bankers and debtors, where both sides take the pain and debts are restructured with a significant portion of debt forgiveness, we are simply going to blow the currency apart in the next big debt crisis.

The Greek crisis isn’t the real thing. It is just a warning sign of what is to come. In geological terms – given that we are all volcanic dust experts now – Greece is the smaller volcano whose eruption is the warm-up act for the really big one.

The most obvious solution is to change the currency arrangement by concluding that the German economy is too strong for the rest of us and should go off on its own with its own currency.

History also tells us that this conclusion is not radical, but actually quite normal. Either the government presides over this currency change in an organised fashion, or it happens anyway, in chaos, through capital flight, currency speculation and a financial crisis.

Consider what is happening now, just five days after the bailout that was supposed to save the euro. The demand for gold has skyrocketed in Germany over the past few days. Ordinary Germans are reacting to their government’s willingness to print money in order to bail out everyone else. Fearing inflation, they are buying gold.

Meanwhile, in Athens, the financial markets are full of rumours that Greeks are hoarding euro notes with German serial numbers. If Greece leaves the euro, they can redeem these German-issued notes at their full value. (The assumption is that euro notes printed by the Greek central bank will be worth much less.)

All the while, the euro is weakening against the dollar, yet politicians talk about having borrowed hugely to save the currency.

However, experience going back to the 19th century indicates that, after a huge credit bubble, the choice is simple: either you can save the currency or save the economy, but you can’t save both.

If European governments want to keep the currency, they must impose austerity on their countries in order to squeeze more out of the budgets to pay the debts that their countries and peoples incurred in the boom. They transfer the debts of the private sector to the state, or vice versa, with guarantees and backstops. So the marginal euro in tax revenue goes to pay the rotten legacy of history, rather than to build the foundation for the future.

What European governments don’t seem to understand is that you can’t have a weak economy with a strong currency. The only way you can sustain that is by borrowing even more now to plug holes, which is precisely what the EU is doing.

The fundamental truth that our establishment has yet to appreciate is that a strong currency comes from not having any debt, rather than from incurring more debt.

Real business thrives as long as the currency in use is accepted by all, and there is enough of it around to lubricate the economy. The history of currency changes is dramatic. There is no easy way to do it, but the wealth of a country is real wealth: the wealth of people, the brains, talent and the growth of the economy.

If an economy doesn’t grow but tries to pay back huge debts, it will turn into a debt-servicing agency, which hollows out the productive marrow of the society. This is not a recipe for success, but a harbinger of disaster.

If we want to be a dependency of the European Central Bank, then giving €7 billion (which we don’t have) to Greece is the right way to go.

If we keep going this way, Ireland will end up with a huge EU-subsidised public sector, a small but highly productive multinational exporting sector and hardly any domestic small businesses in the middle. Is that what we want?

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