The common question at office parties is not about the botched Arriva transport system but about what will happen if the euro collapses. Many are wondering what could really hit us next year if, as euro members of the Mediterranean club, we are expelled. Will a two-speed Europe be the only viable solution? Imagine the confusion that a collapse of the euro will have on the markets. The patient has been avoiding surgery for a number of years and instead has been relying on sugar-coated palliatives. What will really happen if the medics inform the patient that amputation is the only effective remedy?

Just reflect on the words of Poland’s foreign minister, Radek Sikorski, who last week gave a speech in Berlin warning about the catastrophic fallout from such a disaster. He thinks it could be far worse than anyone else is so far anticipating. And, as is to be expected, eurosceptics in the UK are rejoicing that the end is near. It has been revealed that UK embassies are preparing to help citizens abroad through a potential banking collapse and eventual riots arising from the debt crisis. It is no secret that the UK Treasury has begun contingency planning for such a collapse .A senior minister told the Daily Telegraph: “It’s in our interests that they keep playing for time because that gives us more time to prepare.”

Almost every day, the media is focused on bad news concerning fresh predictions on the possible collapse of the euro. Some say there is a small chance that the euro will survive until Christmas, while others expect it to falter a few weeks after the New Year celebrations are over. The Daily Telegraph reports that, at a secret meeting in the UK with leading banks Barclays, HSBC, Lloyds, RBS, Santander UK and Standard Chartered, the Financial Services Authority urged them to brace themselves for the inevitable. Several brokering companies and banks have started a trade testing of the national currencies that existed before countries joined the eurozone. It is no exaggeration to say that a collapse of the euro could send the world’s most advanced economies into a severe recession, dragging emerging markets with them into a deep vortex.

According to OECD chief economist Pier Carlo Pado, the greatest threat to global economic health comes from the eurozone rather than from the tax-and-spend political wrangling in the US Congress. But having seen the tell-tale signs of a potential collapse, one could be excused for asking what went wrong and who is to blame?

Let us contemplate the effectiveness of the massive army of bureaucrats (over 16,000 full-timers) who are constantly monitoring the enlarged EU and issuing infringement notices to those who break the Maastricht Treaty. What went so wrong in such a regulatory behemoth, when massive debts were suddenly discovered in Greece, Italy and Portugal, among others. Have the regulators been hoodwinked? We all know how difficult it is to join the euro club, with its rigid rules. It was always thought to be an exclusive club for healthy economies – with the criteria for joining the euro extremely tough and the barriers to entry equally stringent. Let us refer to the Maastricht convergence criteria, which stated that:

a) Public budget deficit as a percentage of GDP should be less than 3 per cent.

b) Gross public debt should not exceed 60 per cent of GDP.

c) The inflation rate should be within 1.5 percentage points of the best three EU performers.

d) Long-term bond yields should be within 2 percentage points of the best three members.

Such conditions are no joke and when they were set in 1993 they set stiff criteria for any new applicant. By 1997, only Luxembourg had satisfied them but Italy, Greece and Belgium – who did not pass the litmus test – were admitted with certain conditions. All this was politically expedient for the leaders, who argued that only this way could the dreamed of unification philosophy of a single currency materialise. On such shaky foundations was the birth of a currency that was fathered by the dubious policy of solidarity. Come 2008, and the global crush left deep marks on the weaker members of the euro chain. As a safety valve against the chances of any member defaulting, a bail-out fund was hastily established at the time of the Greek sovereign debt crisis. It was named the European Financial Stability Facility and was supported by proportional contributions from each member. So far it can only provide loan guarantees of up to €440 billion, while some €230 billion of that sum has already been earmarked for Greece’s rescue package.

Of course, this fund is too small to cater for a potential bailout of larger countries such as Italy, which has over €1.3 trillion in debts. It goes without saying that a collapse of Italy would inevitably be the end of the euro. The markets have already discounted that fear and Italy is faced with paying higher rates of interest when borrowing to refinance its debt repayments. Currently the yield curve on Italian bonds is reaching seven per cent, which could cripple Italy and force it into a technical default next year. Italy’s cabinet has recently approved a far-reaching austerity programme that includes taxes on housing and luxury items and major pension reforms in a bid to avoid bankruptcy. After the fall of Berlusconi’s government and its replacement by a cabinet of unelected technocrats, Italy is now having to swallow a bitter bill of austerity measures. These include an increase in the retirement age for women in the private sector, which will go up from 60 to 62 in 2012 and then up again to 66 in 2018, instead of in 2026 as previously planned.

All pensions, apart from the lowest, will not be indexed to inflation in 2012 and 2013 and there will be greater flexibility to allow people to work until 70.

The minimum number of years that workers have to pay contributions in order to receive their full pension will be increased from the current 40 years to 41 years for women and 42 years for men. The luxury items affected by new taxes include high-powered cars, yachts and private jets. VAT will be increased from 21 per cent to 23 per cent next year and, as a gesture of solidarity with the suffering masses, new Prime Minister Mario Monti is waiving his salary during the crisis.

The economy will be given a stimulus estimated at €20 billion by 2014 but this includes €10 billion in additional spending to boost growth. Only time will tell if this programme of urgent austerity measures will be effective in reducing the annual deficit to reasonable levels. But the storm is not yet over and the International Monetary Fund (IMF) is rumoured in the Italian media to be preparing a multi-billion-euro rescue of Italy. The IMF is in talks regarding a €600 billion assistance package for Rome in return for austerity and structural adjustment measures, according to an article in La Stampa. According to the Italian newspaper, a range of options is being considered, although the core of the plan would be for the IMF to provide funding to Rome at rates of between four and five per cent, considerably lower than the seven per cent rates forced upon Italian government borrowing in recent days.

Let me conclude with the words of ‘the Iron Lady’ (Margaret Thatcher) who warned us all that: “We are in a difficult situation and we have to win back confidence, because the issue of our reliability has suffered.” Let us hope that the eurosceptics are proved wrong and there will be no funeral after Christmas – but all the invited guests have to brace themselves for tougher conditions after the New Year‘s champagne toasts.

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The writer is a partner in audit and business advisory firm PKF