In presenting his Budget for 2012, Minister Tonio Fenech quite understandably focused on his need to exercise prudence and responsibility in its construction aimed at “providing the necessary support to our families while delivering the right measures to stimulate economic growth”. He rightly highlighted the impact on our economy of the recession which is about to strike Europe.

He allowed himself to indulge in the luxury of Schadenfreude about “the huge deficits burdening fellow European countries, the redundancies they are being forced to put into effect, the reduction in benefits, the increase in taxes and the introduction of payments for education and health are harsh realities that our European trading and tourism partners are facing” as a means of drawing attention to our own relative economic and financial stability, for which he naturally wished to take credit.

But the looming elephant in the room, to which the Minister of Finance did not refer, was the repercussion on Malta of further inevitable turmoil, and possible break-up, in the eurozone. It is now palpably clear that the whole design and concept of the single euro currency is deeply flawed, and has been since its inception 10 years ago. Those political and economic fault-lines have now been exposed by events right across Europe, from small economies such as Greece to larger ones, like Italy, Spain and France. The threat from these intrinsic weaknesses hangs over Malta’s Budget 2012 and beyond like a hand-grenade with the pin removed. Yet Tonio Fenech’s budget speech, which he called “the most important in years”, made absolutely no mention of this, or of how he might deal with it when the explosion happens and the shrapnel starts to fly.

The design of the euro has been dogged by politics from the start and deeply handicapped by poor political leadership. It was President Mitterand of France who demanded that Chancellor Kohl of the then West Germany abandons the Deutschemark for the euro in return for his support for the reunification of Germany. Up to then, the Germans had always understood and argued that the single currency should follow, not precede, political union.

But the two leaders who struck this grand bargain had fundamentally different ideas about how the new currency would operate in practice. France saw it as a precursor to a political arrangement to keep German power in check. Germany was more preoccupied with its own people’s political attachment to the Deutschemark. It would therefore be a currency moulded in the Deutschemark image. There would be no “economic government” or fiscal transfers from richer countries to struggling ones, no bailouts of governments that got into difficulties, no central banking lender of last resort, and no possibility of exit from the single currency.

The fact that France and Germany themselves, after a few years of the euro, were the first to break the three per cent government deficit target cap when they found keeping a lid on spending too hard has underlined not only the member states’ mismanagement of the currency, but also any serious hope that the euro would bring prudent management to the public finances of eurozone countries.

The political and economic risks that were inherent in the euro’s design have been woefully exposed. There have been no examples in history of lasting currency unions being established without prior political union. The European Central Bank lacks the firepower and authority to guarantee and under-pin the EU’s financial system. A “one-size-fits-all” interest rate inevitably generates destabilising imbalances between member states in the eurozone. Overridingly, countries locked into a single currency with no possibility of exchange rate adjustment inevitably develop serious problems of economic competitiveness.

With the benefit of hindsight, it is clear that Europe’s leaders should never have launched the euro currency based on such flimsy economic and political foundations. And, if proper due diligence had been applied, Malta should probably not have joined it since we can see now that the risks of contagion for an economy of our size far outweigh the likely rewards. The crisis that faces some countries in Europe today (Portugal, Ireland, Greece and Spain, now joined by Italy) of mountainous debt, sluggish growth and poor productivity – the worst crisis since the second world war according to Chancellor Angela Merkel − is a grinding treadmill from which it seems unlikely they will emerge for a decade or more.

What now? Malta’s future – and of course the future fate of the rest of the eurozone, possibly also of Europe itself – undoubtedly lies in German hands. There seem to be two feasible, though equally fraught, alternatives. Either, first, Germany drops its resistance to using the European Central Bank to shore up Italy, Greece and other heavily indebted countries in the eurozone by throwing hundreds of billions of euros more into saving them from default. Or, secondly, urgent talks are started to re-shape the eurozone with fewer member states and tighter fiscal rules and budgetary discipline.

The first course will enrage the German electorate (and Angela Merkel’s own party), who have visceral memories of the hyperinflation of the Weimar Republic in the 1920s.

But the second course would also be extremely dangerous to execute in practice. Which countries would be in and which would be out? Could France, with its considerable debt burden, and already under pressure from the bond markets, be part of an inner euro core? That France would not be would be unthinkable to Germany. How would those in the outer core (among which, I suspect, would be Malta because it is too small and vulnerable an economy to meet the inner core’s criteria) be relegated from the eurozone without causing economic mayhem? This course could well lead to the break-up of the EU with huge political acrimony and global economic consequences.

I conclude that either of these courses would be politically highly fraught – especially for Mrs Merkel who faces re-election in 2013 – and carry huge risks. But it seems likely that of the two, despite German reservations, the eurozone will continue muddling along by taking the soft political option (compared with the alternative) of simply throwing money at the problem through the intervention of the European Central Bank. The ECB will become the lender of last resort and print money. If that is what the new European Central Bank president, Mario Draghi, decides to do it seems Mrs Merkel will not in the end object.

Malta too faces an election by 2013. How the euro elephant in the room is handled will affect significantly the outcome of that election. In the longer term, it is inevitable that the eurozone will require new rules of conduct. Its members will have to conform to stricter fiscal rules and accept greater intrusion by outside independent institutions in their economic decisions. This will entail a considerable loss of national sovereignty. Ways of bridging the political and economic fissures will have to be found – through changes to the EU’s treaties – to accommodate what will be a two-speed Europe between 17 member states in the eurozone and those outside it. It is vitally important that the government prepares Malta to meet the economic and political shoals ahead.