For all the seven long years since the signing of the Maastricht treaty started Europe on the road to that unified currency, critics have warned that the plan was an invitation to disaster. Indeed, the standard scenario for an EMU collapse has been discussed so many times that it sometimes seems to long-time eurobuffs like myself as if it has already happened - perhaps because it is modeled on the real crisis that afflicted the European Monetary System back in 1992.

Here's how the story has been told: a year or two or three after the introduction of the euro, a recession develops in part - but only part - of Europe. This creates a conflict of interest between countries with weak economies and populist governments - read Italy, or Spain, or anyway someone from Europe's slovenly south - and those with strong economies and a steely-eyed commitment to disciplined economic policy - read Germany. The weak economies want low interest rates, and wouldn't mind a bit of inflation; but Germany is dead set on maintaining price stability at all cost. Nor can Europe deal with "asymmetric shocks" the way the United States does, by transferring workers from depressed areas to prosperous ones: Europeans are reluctant to move even within their countries, let alone across the many language barriers. The result is a ferocious political argument, and perhaps a financial crisis, as markets start to discount the bonds of weaker European governments.

Well, here we are, right on the brink of the creation of "euroland", and it is now clear that none of the problems EMU critics have warned about will arise, at least for a while. Indeed, it turns out that Murphy was wrong: not everything that can go wrong, does. Unfortunately, the remainder of the revised law states that things you never imagined could go wrong, will - and that is what is happening in Europe right now. Instead of the expected fight between hard-nosed Teutons and dissolute Latins, what is shaping up is a conflict between euroland's central bankers and left-of-center, reflation-minded governments all across the zone - with the most unreconstructedly leftist, most aggressively reflation-minded of these governments being that of, yes, Germany.

But let's back up a bit, and recall the fundamentals of EMU. Never mind the question of whether a unified currency is a good economic idea: EMU has always been more about political symbolism than strict economics. But while the ultimate if rarely acknowledged purpose of a unified currency is to move Europe toward the long-run goal of political union, at this point euroland is anything but ready to think of itself as a nation. After all, the countries cannot even agree on a set of heroes to celebrate on their currency: where almost every money in the world bears the portraits of great men and women, the new euro notes will bear pictures of bridges, gates, and windows - not any actual bridges or gates, mind you, but imaginary bridges and gates that might come from any European country. (There was a minor scandal a few months ago when it turned out that one of the pictured bridges was actually, mein Gott, recognizably French. It was quickly replaced with something acceptably generic).

But how do you run a common currency without a common government?

Europe has some experience with this sort of thing. For almost two decades - since the formation of the European Monetary System in 1979 - most European nations have committed themselves to maintaining fixed exchange rates between their currencies, which basically means adopting a common monetary policy. And while there have been occasional flareups in the arrangement - a last-gasp attempt by the French to follow their own path back in 1982, and a wave of speculative attacks that pushed Britain out of the system a decade later - the EMS has proved surprisingly durable. How did Europe manage to follow a common monetary policy? The was a bit of neatly calculated hypocrisy. Athough the EMS was in principle a symmetric system, with all countries treated equally, in practice it was tacitly run as a German hegemony: the Bundesbank set interest rates as it pleased, and other central banks then did whatever was necessary to keep their currencies pegged to the Deutsche mark. This arrangement allowed the system to meet two seemingly irreconcilable demands: the insistence of Germans, who still remember both the hyperinflation of 1923 and the economic miracle that followed the introduction of a new, stable currency in 1948, that their beloved Bundesbank keep its hand firmly on the monetary tiller; and the political imperative that any European institution must look like an association of equals, not a new, um, Reich. The Europeans, they are a subtle race.

But come actual monetary union, this subtlety will no longer work, because a truly unified currency must have someone - a European Central Bank - explicitly in charge. How could this institution be set up to give each country an equal voice, yet satisfy the German demand for assured monetary rectitude?

The answer was to put the new system on autopilot, pre-programming it to do what the Germans would have done if they were still in charge. First, the new central bank - the ECB - would be made an autonomous institution, as free as possible from political influence. Second, it would be given a clear, very narrow mandate: price stability, period - no responsibility at all for squishy things like employment or growth. Third, the first head of the ECB, appointed for an eight-year term, would be someone guaranteed to be more German than the Germans: Wim Duisenberg, who headed the Dutch central bank during a period when his job consisted almost entirely of shadowing whatever the Bundesbank did. Finally, just in case governments should be tempted to use their control over taxing and spending to challenge the ECB's grip over monetary policy, Germany insisted on a "stability pact" that limited the ability of euroland governments to run budget deficits.

And so there it was, a neatly wrapped-up package, ready for delivery on 1 January 1999. But a funny thing happened on the way to EMU: Europe's economic and political complexion changed, and the biggest change came in Germany itself.

The first sign of change came in France. Once upon a time France was famed for its addiction to deficit spending and over-optimistic monetary policy. By 1997, however, having weathered the crises of 1992 and 1993 without any devaluation of the franc, the French appeared to be as devout in their worship of sound money as the Germans. Then came the election of June, which was won by Socialist Lionel Jospin, a man who promised to bring down unemployment. And as one of its early moves the new government suddenly reopened the supposedly settled issue of who would head the ECB, putting up Banque de France head Jean-Claude Trichet as its preferred candidate. After a confused interlude, the confrontation ended with the agreement that Mr. Duisenberg would indeed head the ECB, but Duisenberg either agreed or didn't agree (I can't seem to get it straight - they really are subtle, these Europeans) to resign in favor of Trichet half-way through his term.

Now the French left is not what it used to be. Jospin's government has actually been quite careful and prudent in its spending policies, and has not tried to assert any monetary independence. Nor is there any discernible substantive difference between Trichet's views on policy and Duisenberg's.

But Jospin's victory, it turned out, was only a forerunner of the big event: the defeat of Germany's Helmut Kohl, arguably the most important architect of the new Europe, by Gerhard Schroeder's Social Democrats. The symbolism of this win was powerful, because it meant that - thanks to the usual Byzantine political intrigue in Italy, but as a result of voter disenchantment with conservatives elsewhere - all of Europe's big countries, including the UK (which is outside euroland for the moment, but still exerts a lot of influence) are now governed by left-of-center parties. And the German left, it turns out, *is* what it used to be - indeed, the governing coalition now includes the Greens, adding a tinge of true radicalism. The people who now rule Germany have no patience with the Maastricht ideology, which says that all good things come to those who have balanced budgets, sound money, and flexible markets. Schroeder's chief economic official Oskar Lafontaine, in fact, sounds not like a German but like an old-style French socialist: he has many doubts about free markets, might even consider rolling back some of the moves made in recent years toward more flexibility in things like wages and working hours - and he definitely wants reflationary monetary and fiscal policies.

And he is probably half right. Not about free markets: Germany's markets, though freer than they used to be, are still ludicrously overregulated by U.S. standards; the modern German economic miracle is the fact that given the level of wages, benefits, and regulation there are any jobs left. But even those of us who do believe in supply and demand are a bit perplexed by European monetary policy. Over the last few years the inflation rate in euroland has been steadily dropping, normally a clear indicator of excess capacity in the economy; over the last few months consumer prices in both Germany and France have actually been falling. Euroland as a whole has double-digit unemployment, and growth, after a couple of fairly good years, is slowing as the continent feels the backwash from the world financial crisis.

The actual situation as EMU begins, then, is nothing like the way we all imagined it. Instead of an "asymmetric" economy, in which some countries want tight money while others want a boost, the whole zone is a prime candidate for lower interest rates - and all of the major governments agree that the central bankers should emulate (EMUlate?) that wild and crazy guy Alan Greesnpan, and loosen up. So there is, in the end, no conflict of interest. Indeed, EMU could get off to a rousing start by cutting interest rates and making everyone happy.

But EMU wasn't designed to make everyone happy. It was designed to keep Germany happy - to provide the kind of stern anti-inflationary discipline that everyone knew Germany had always wanted and would always want in future. So what if the Germans have changed their mind, and realized that they - along with all the other major governments - are more worried about deflation than inflation, that they would very much like the central bankers to print some more money? Sorry, too late: the system is already on autopilot, and no course changes are permitted.

Of course, that isn't literally true. There is no fundamental reason why the Bundesbank couldn't have given Mr. Duisenberg a housewarming gift in the form of a late-year interest rate reduction; nor is there anything in the ECB charter that would keep him from celebrating his new job by throwing an interest-cutting party. So many economists are tearing their hair out wondering why it isn't happening. But we must remember that the whole point of the setup was to create an institution that can say no, that will not give politicians what they want. To say yes, to give the politicians what they want even if what they want is entirely reasonable, feels like a betrayal. In fact, the more the politicians demand action, the more the central bankers dig in their heels.

So what do the europessimists - the people who believe that the whole experiment will come to grief - say now? Well, they have a new argument. Pretty clearly, Europe is not about to tear itself apart because it cannot agree about monetary policy. In fact, everyone but the central bankers now *does* agree about monetary policy. The clear and present danger is, instead, that Europe will turn Japanese: that it will slip inexorably into deflation, that by the time the central bankers finally decide to loosen up it will be too late.

These Europeans, they are a subtle race. And this time they may have subtled themselves into a very tight corner.