The euro's "weakness" (the currency was very strong towards end 2008)is good news for the eurozone economy, which is gaining on competitive grounds, and eurozone investors, who are gaining on the exchange rate. So although the MSCI World index (international equities) has lost more than 8% in dollar terms since the start of the year, it has remained virtually unchanged in euro terms.

The weakness of the euro is surprising though. The European Central Bank is still wavering over whether to ease monetary policy as aggressively as its US and UK counterparts - not to mention the Bank of Japan, whose zero-rate policy needs no introduction. The US Federal Reserve has also hinted on a number of occasions that it would have no qualms about buying government debt to prevent long-term rates (over which it has no direct control) rising, which would endanger its efforts to boost the economy. The fear of seeing the US central bank print money would be enough to set the dollar into freefall in normal circumstances.

But these are not normal circumstances. The financial crisis and the recession have hit Europe and its banking system hard. The famous prediction of Milton Friedman (winner of the Nobel Prize for Economic Sciences) that the euro would not survive its first economic crisis has been revived and many commentators, especially in English-speaking countries, are alluding to a break-up of the euro. Politicians in the eurozone naturally rush to its defence, referring to such allegations as "absurd" and "totally unthinkable".

And the break-up of the euro does seem unthinkable at the present time: one could argue that without the euro, Europe would have been even more seriously affected by the financial crisis. Indeed, the experiences of Iceland and Hungary could convince some countries to speed up their efforts to join the eurozone. The European Central Bank is often criticised for not easing policy more aggressively or reacting more quickly, but in general its response to the banking crisis should go some way to enhancing its reputation.

While the Maastricht Treaty does not explicitly prevent a country from leaving the euro, it goes without saying that the economic and political costs of such a move would be enormous. Countries such as Italy and Greece could benefit from massive devaluations if they left the euro; but on the negative side, interest rates would rocket. What they would gain by leaving the euro would be cancelled out by what they would lose - and they could lose more than they bargained for. Leaving the euro would therefore only make sense for the 'good students' if the other countries' non-compliance with the budget deficit and public debt criteria of the Maastricht Treaty led to a resurgence in inflation. Such a situation may arise one day but currently fears of deflation are dominating.

Finally, it is important to note that no-one can force a break-up of the euro. This situation contrasts with 1992 when the investment decisions of the famous investor George Soros prompted the exit of sterling from the European Monetary System (EMS).

Although the euro will be able to calmly celebrate its tenth birthday, it does not hide the fact that there are increasing imbalances within the eurozone.

The first imbalance has to do with wage costs. To assess competitiveness between countries, economists use "unit labour costs", which can be computed by dividing hourly labour costs by output per hour. OECD data shows that Southern European countries have failed to keep up with Germany in terms of competitiveness. In the past, these countries would have used devaluation to deal with falling competitiveness, but this is no longer possible under the single currency. (In contrast, America and the UK have taken advantage of depreciation in their currencies against the euro since 2000 to offset rising domestic costs).

Unit labour costs in 2007

(* 2006) (index base year 2000 = 100)

Germany : 98,4

France*: 112,4

Spain: 122,7

Greece*: 113,9

Italy: 120,9

Portugal*: 116,5

Ireland: 125,3

eurozone: 111,4

European Union: 116,1

United Kingdom: 119,3

United States* 111,2

Japan*: 86,9

Brazil: 97,5

Worse still, some countries are experiencing falling competitiveness compared to their immediate non-eurozone neighbours: prominent examples include Ireland and the UK, and Greece and Turkey. The Turkish lira has lost 20% against the euro since October 2007, which should help to boost the tourist industry in Turkey.

The loss of some countries' competitiveness following the increase in unit labour costs is reflected notably in their current account balance. Since 2000, Germany's current account surplus has risen sharply, contrasting with Spain and Greece, where deficits are rising.

The lack of economic convergence could lead to a serious problem for the eurozone in the medium term. While monetary union should be in theory a consequence of economic convergence, the eurozone is built on the opposite idea - i.e. that monetary union will lead to economic union. The stability and growth pact adopted in 1997 was designed to facilitate economic convergence by imposing a certain number of criteria that the eurozone countries have to comply with, especially in terms of budget deficit and public debt. Critically, these criteria do not deal with labour costs. What's more, the convergence criteria have been relaxed in a number of areas and, in the current crisis, compliance has become less and less of a priority.

Demographic trends and their impact on public spending are another major long-term challenge for the cohesion of the eurozone. A recent working paper published by the European Central Bank (1) concludes that public finances are currently only sustainable in Finland and that the required adjustment effort for other countries to bring their public finances into line is currently much greater in France, Greece and Portugal than in Germany and Austria. The gap between interest rates on bonds issued by Greece and Germany (the yield on the 10-year government bond is 2.9% for Germany and 5.9% for Greece) illustrates the market's lack of confidence in Greek public finances.

The imbalances described above are not new, nor have they prevented the euro from being a strong currency from 2001 to 2008. However, the economic environment has changed significantly and Europe has also the severity of the banking crisis and upheavals in Eastern Europe to contend with. The result is that while the two main currencies are facing problems, the euro's are only starting to be taken on board.