THERE IS NO EUROPE:

We're hearing a lot of talk these days about how Europe is staging a modest recovery that's sufficient to save the euro. So I was surprised when one of the top international economists of the past four decades, and a former euro-fan, told me that he's changed his view. "The chances are higher than ever that the what I call Teutonic Europe and Latin Europe will split into at least two currency zones," says Robert Aliber, now retired from the Booth  School of Business at the University of Chicago, where I was privileged to have him as a teacher many years ago.

Pay attention to Aliber, affectionately known by his initials "RZA" to his students. He predicted the disaster in Iceland in mid-2007, when the experts at the World Bank and IMF were still asleep. "Iceland was suffering from a very high level of indebtedness and very large trade deficits," recalls Aliber. "They got the money to pay the interest in the form of new loans." For his foresight in Iceland, Aliber won plaudits from Michel Lewis in his bestseller Boomerang.

Aliber cites two factors for his growing pessimism on the euro. The first is the EU's decision to keep Greece in the common currency at all costs. "That was a dreadful mistake," says Aliber. Greece, he says, was highly uncompetitive as a euro-member from its entry at the start of 2001. "Greece fudged the data to hide its problems in order to join the euro," says Aliber. "It used sham contracts to get lots of its debt officially off its books." He says that when the inevitable collapse began in early 2010, the EU should have forced Greece to exit, "So that its prices, which were set too high at the start because of the fudged data and only got higher, would be reset." A euro-escape would have made Greece's exports and tourist industry far more competitive, and avoided what Aliber calls "A situation resembling our Great Depression."

The second force is what he calls "the pattern of imbalances" between the northern "Teutonic" and southern, or "Latin," zones. Germany, Austria, Finland, and the Netherlands are all running big trade deficits by selling lots of cars and computers to their southern neighbors. France, Spain, Italy, and Portugal are running big trade deficits because their products are just too costly to compete with exports from the north. "The Latin trade deficits will not go away," says Aliber. "France's indebtedness will only increase. Germany has a vibrant export sector, France does not."

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