WHEN Gordon Brown chairs the meeting of G7 finance ministers and central bankers this morning, he ought to address his preliminary remarks about the risks to the world economy primarily to his fellow Europeans.

Judged as a whole, the world economy is healthier today than it has been for many years. Almost wherever we look, we see faster growth, lower unemployment, less feverish financial speculation and stronger conditions in the developing countries (including much of Africa) that at any time since 1997. There are, however, some worrying imbalances. And the oddity of these imbalances is that whichever countries may cause them — whether America, with its huge budget deficits, or China, with its refusal to revalue the renmimbi, or Japan, with its enormous export surplus — the main victims always seem to be in the eurozone.

As if to hammer home this message, the German Government announced yesterday that unemployment had just breached five million for the first time on record, while retail sales had suffered their worst annual decline since the immediate aftermath of the reunification boom. And in case anyone believes that such economic woes are a purely Germany problem, the French Finance Minister recently characterised the global economic issues to be debated at this morning’s G7 meeting like this: “If we stay in the current situation it is possible to imagine a catastrophe at world level.”

The eurozone’s anxiety may seem surprising, given that the euro was supposed to insulate its users from economic disturbances in the rest of the world. But “euroland” has not just been the weakest part of the world economy since the single currency was created in 1999. It has also suffered more economic instability than America, and far more from external shocks such as the dot-com crash and the 9/11 attack than Britain.

There is nothing too mysterious about the eurozone’s erratic performance. While America, Britain and Japan have used interest rates and fiscal policies to stabilise their economic activity and unemployment in the face of external shocks, Europe has discarded the lessons of postwar economics. It has reverted to a pre-Keynesian belief in laissez faire. Instead of adjusting interest rates to stabilise the economy in the face of shocks, this “steady hand” doctrine teaches that interest rates should be kept stable and the economy should adjust, taking any shocks on the chin. The Stability and Growth Pact has paralysed European fiscal policy. Now, while Japan, China and other Asian countries actively manage their currencies to protect domestic exporters from the devaluing dollar, and the Bank of England looks closely at sterling in deciding its interest rate moves, the Europeans have extended their doctrine of absolute laissez faire to the currency markets.

As a result, the euro has risen sharply not only against the dollar, but also against the yen, renmimbi and other Asian currencies. European exporters have been squeezed out of high-end markets by US, Japanese and South Korean manufacturers, while Chinese manufacturers destroy the labour-intensive industries which still provide jobs for millions of Europeans.

The significance of this situation for the G7 is that it is the only body which can manage currency relations between the world’s major economies. If there were ever to be an agreement on restraining the dollar’s devaluation and the rise of the euro, it would have to be reached at the meeting today. But this is extremely unlikely since the US, Britain and Japan are all quite comfortable with the present situation, while Europe’s only reaction to the recent upsurge in the euro has been to widen the circle of blame.

The Europeans used to lecture America about its deficits, but they may now have realised this is a waste of breath. When the Europeans persistently repeated their anti-deficit homilies at G7 meetings (the conventions of eurozone unity require that all European positions be stated five times over — by the German, French and Italian finance ministers, then by the Economics Commissioner and finally by the President of the European Central Bank) the Americans would shuffle their papers, doodle on their notepads and tap messages to their loved ones on their BlackBerries.

The Europeans are therefore turning on Asia. If America refuses to stop the dollar from falling, then Asians could at least let their currencies rise alongside the euro, instead of linking them to the dollar and thus undercutting European exporters. This is a perfectly reasonable argument, but what will happen when the Europeans deliver this new version of their speech?

The Americans will carry on doodling, after stating briefly that they would be perfectly happy with whatever deal the Europeans and Asians want to strike among themselves. The Japanese will then point out politely that the euro has kept on rising because Europe offers 2 per cent interest rates, while Japan pays zero per cent. If the ECB does not want foreign capital inflows, it could simply reduce interest rates to zero. Alternatively, the Europeans could follow another Japanese example and buy dollars in the currency market to prevent the euro from going up. If European authorities are not prepared to take such elementary precautions to defend their economic interests, why on earth should they expect Japan, China or the US to alter policies on Europe’s behalf?

The G7 discussions will probably end with some such rhetorical question and all parties will go home convinced that they are in the right. The trouble with this psychologically satisfying arrangement is that currency trends will continue to blight Europe, while America, Japan and China laugh all the way to the bank. Europe’s monetary diplomacy reminds me of the professional poker player’s maxim: you should be able to spot the sucker at the table right away. And if you can’t spot the sucker? That is because the sucker is you.

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