The conditions will be ripe for joint intervention in support of the euro once the US turns against an overvalued dollar

There is a striking contrast between the depreciation of the euro currency and the sharp turn for the better in the behaviour of the actual euro zone economy. Another striking contrast is between the dreadful corporatist rhetoric still employed by so many EU enthusiasts and the more pragmatic policies being followed by corporations and unions at ground level.

Both contrasts were exhibited during a visit to Brussels for a seminar organised by the European Commission to discuss its latest forecasts and their implications. I found the discussion of actual numbers more enlightening than the cloudy rhetoric about future policy in the wake of the recent Lisbon summit.

The contrasts were exemplified by the reactions to a throwaway remark of mine. Belgian radio had run a competition for a new EU slogan. It was won by "Unity in Diversity". When someone asked if anyone had a better idea, I suggested Europe Without the Social Partners. (For Anglo-Saxon readers, these are a euphemism for trade union and employer organisations which now have a built-in role in the bureaucratic structure of committees and communique writing.)

It was as if I had torn up the Ten Commandments. As a result few people took the slightest notice of anything else I said. Even during the coffee and lunch pauses people came up to me in a very excited way to ask how you could have democracy without the social partners. There were of course a few people who said they agreed with me, but they spoke in still small voices, as Calvinists might have done at the time of Spanish rule over Flanders.

The disquieting feature was not the fact of disagreement, but that so few of the participants even knew of the existence of non-corporatist models of liberal constitutional democracy. They were here showing their abysmal ignorance, not of American capitalism, but of ideas which originated in Europe whether it was the German idea of the Rechstaat, Friedrich Hayeks Constitution of Liberty, the original German post-war social market economy, or even the writings of Alexis De Tocqueville.

In a nutshell, the point is that organised producer groups are responsible neither to the political marketplace nor to consumers voting with their pockets. If corrective action is needed to improve on the workings of the market this should be undertaken by properly elected political authorities and not by producer groups with an axe to grind.

To be frank, the "social partners" are a euphemism for trades unions. The employer side is merely a feeble attempt to bring in some counter pressure. EU political institutions work on the same assumption as the British Labour governments and corporatist Conservative ones of the 1970s. This is that the only way to prevent unions from pricing people out of work, or acting against free trade, is to bring them into the political process - in other words to buy them off with the trappings of power.

The moral I draw from this was not that one should stick to non-controversial bromides or detailed technical points. It was that if one wants to say something against the conventional wisdom of one's company, one needs to devote every second of one's available time to explaining what one means and abandon all other observations.

It is alas necessary to throw the occasional hand grenade into euro proceedings. The dissertations of German and Dutch academics and central bankers about the need for flexible markets and prices are just listened to as background music, without stimulating any thoughts among those present.

Fortunately the whole corporatist process is being undermined - not by Third Way policies or by supposed British leadership - but by market forces themselves. The best contribution was made by a Portuguese professor, Luis Miguel Beleza, who had himself taken the lead into his country's successful effort to join the euro. He remarked that the Lisbon communique - which I have tried several times to read but have never got to the end of - focused on everything except the essentials.

Fortunately, without waiting for national policies to be amended, individual employers and unions have been negotiating modest pay settlements to preserve jobs. It has happened in different ways in different countries. In Germany, much of the impetus has come from the eastern länder where many companies are simply bypassing the national settlements which are so obviously unsuitable to depressed high unemployment areas. In France employers have somehow taken advantage of the otherwise perverse mandatory 35-hour week to negotiate changes in other aspects of labour contracts which reduce costs - a tortuous route, no doubt known as French logic.

It was a relief to look back from the unsatisfactory discussion of principles to the report of a Commission economist, Antonio Jose Cabral, on actual developments. Growth in both the eurozones and the wider EU area has picked up from the doldrums of the 1990s is now faster than in the UK, and is likely to be faster than in the US if the Fed succeeds in curbing the present unsustainable boom. But it is not only output that is rising. Employment is increasing and joblessness is falling. So much so that the popular idea of Europe as a high employment zone might soon be looking dated.

There has of course been a cyclical recovery based on the depreciation of the euro, much of which was needed and desirable. But scrutiny of the figures suggest that there is something more than a short term business recovery. The most striking indicators are from the labour market where the cost of taking on workers has been falling for some time. Of course social security taxes and other labour overheads remain high in most euro zone countries by comparison with the Anglo Saxon ones. But they have not changed much in recent years and have not prevented unit labour costs from falling.

The adjoining charts track real compensation per employee as well as labour costs. The difference between them is of course labour productivity. As I explained a fortnight ago, this can be a misleading guide to employment prospects, as productivity can be increased by dismissing the least productive workers or closing down the least productive plants and expanding in the emerging economies instead.

The experience of US and Britain suggests that employment is indeed responsive to labour costs, but with a much longer lag than those impatient to make anti-market debating points admit. In the UK the Thatcher measures against union power did not have a measurable impact on pay until the Major period in the 1990s; and they have only begun to reduce equilibrium unemployment in the last few years, mostly under Blair.

Prof. Beleza said that the acid test in the euro zone would be whether the unemployment rate in the next recession would be less than in the last. This will not be a bad test on the assumption that that recession is of a normal kind and is not unusually severe or unusually mild.

Meanwhile, the charts show what has been actually happening. They are in real terms and therefore do not show international competitiveness, which is also much affected by inflation and exchange rate movements. The main value of the comparisons with the US and the UK is that they show that the euro zone countries may now be following the Anglo Saxon lead in pricing workers into employment. Indeed, unless one goes overboard about the new economy, there is a warning that real take-home pay in the US and Britain may be rising more quickly than their economies can sustain, once the bonus from over valued exchange rates and stock markets comes to an end.

Where does all this leave the euro? Its depreciation has now become too much of a good thing. It is passing from being a welcome correction and a useful kick-start to becoming a possible source of inflationary pressure. Indeed, as Prof. Joachim Scheide of the Kiel Institute noted: it is no coincidence that the weakness of the currency has been combined with a continuing overshoot not merely of the ECBs monetary targets, but of any reasonable upward adjustment of them.

Intervention itself would be counterproductive unless combined with a reinforcement of monetary policy. This could be achieved if the effects of intervention were not sterilised - that is they were allowed to tighten the money supply. The result would be likely to be some increase in short term interest rates, but it would send out a better signal than a series of half-hearted small discretionary increases in official ECB rates.

If one thinks of the present international configuration as a theoretical game, the conditions may soon be there for successful concerted intervention. The eurozone countries would like some appreciation; Japan and the UK would like some depreciation of their currencies. The problem has been the US, which has been happy with a high dollar as the one curb on domestic inflation. But the dollar has now risen so far that US resistance to a lower dollar could well begin to ebb, especially as the forthcoming US election could increase sensitivity of policymakers to the problems of exporters. Once there is a coincidence the objectives of the principal actors it should not be beyond the wit of man or woman to put them into effect.