When, oh when, will Europe face the truth? The answer, if only Europe's leaders would listen, is that France is in the euro, making its debt dynamics look much more problematic, whereas Britain is not. In last Friday's downgrade, Standard & Poor's spelt it out. Stating the bleedin' obvious, S&P said that policy action in the eurozone had fallen a long way short of what was required to resolve the crisis. What is more, the action that has been taken is "predicated on only a partial recognition of the source of the crisis: that the current financial turmoil stems primarily from fiscal profligacy at the periphery of the eurozone." Again stating what has long been obvious to all but the eurozone leadership, S&P diagnoses the problem as much more "a consequence of rising external imbalances and divergences in competitiveness between the eurozone's core and the so-called "periphery." "A reform process based on a pillar of fiscal austerity alone," concludes S&P, "risks becoming self-defeating, as domestic demand falls in line with consumers' rising concerns about job security and disposable incomes, eroding national tax revenues." If you misdiagnose the problem, you are highly likely to prescribe the wrong sort of treatment. I've thought long and hard about why Europe should be so bone-headed about the crisis it faces. At first, it was tempting to put these failings down to want of intellectual vigour. Economics, goes the old joke, is not rocket science; if it was the Germans would be much better at it. But actually there are some very fine German economists all of whom fully understand the nature of the problem; no, it's worse than that. What it's really about is refusal to face up to the truth - that monetary union, the imagined crowning glory of the European project, cannot work under the present framework or anywhere close. Europe's leaders don't want to hear this. They still cling to the belief that monetary union of fiscally sovereign nations can, provided everyone sticks to fiscal disciplines, be made a functioning and transformational engine of growth. Events demonstrate beyond doubt that it cannot. Until collective responsibility for the region's debts is assumed, implying significant transfer of liability from periphery to core, this is a crisis which is not going away. The French downgrade merely illustrates the nature of the problem. French commentators ask why France and not Britain? This is very easily addressed. Never mind the impact on France of the eurozone's deepening political, financial and monetary problems, which is quite bad enough, in themselves Britain's chances of returning to fiscal sustainability are in fact significantly better than those of France and most other single currency members. As Citigroup's Michael Saunders points out, the UK taxpayer is far less exposed than his French counterparts both to the risk of having to backstop banks against sovereign risk and having to bail out other sovereigns. The UK has also committed itself to a detailed and multi-faceted deficit reduction programme which has been pursuing, thus far at least, with military discipline. There is every chance that this will continue. It is sometimes said that in studying democratic models to see which one they might eventually want to adopt, the Chinese have identified Britain as the most compatible because it allows for still fairly effective executive decision making from the centre. There is no way of determining the veracity of this story; on democracy more so than anything, the Chinese leadership remains utterly inscrutable. Yet it's got a ring of truth about it. Compared to Europe, or even the US, Britain has shown itself to be almost totalitarian in its decisiveness. But perhaps most important of all, the monetary flexibility that currency sovereignty allows makes fiscal retrenchment less painful for Britain than it's proving within the single currency. Monetary independence means there is less chance in the UK of falling victim to the eurozone austerity trap - where fiscal retrenchment succeeds only in making the deficit worse because it crimps growth, undermining tax revenues. Extensive use by the Bank of England of quantitative easing (QE) has succeeded not just in reducing the cost of government funding, it's also helped support growth and thereby proved a quite effective counter to fiscal consolidation. There are plenty of risks associated with sovereign currencies - devaluation and inflation being the most obvious - but default is not normally among them. If push came to shove, the government could always simply print money to repay its debts. These options are not open to France or other eurozone members. The reason Denmark has a significantly lower bond yield than Finland, even though the two countries have roughly similar economic profiles and the Danish krone is pegged to the euro, is that Denmark can still print its own money. Investors know this, making it less subject to speculative attack. So far, eurozone leaders have failed to provide solutions to the self-evident flaws in their construct. The bail-out facility is too small to backstop fiscally distressed states, and even if the European Central Bank were to throw caution to the wind and embark on Anglo-Saxon-style QE, it still wouldn't address the underlying problem of widely divergent competitiveness. The UK should not and must not sign up to further International Monetary Fund support for the eurozone when there are no credible plans for addressing these issues. If this were just an issue of insufficient liquidity, then it surely would have been solved by now, given the expansion of central bank balance sheets which has already taken place. Unfortunately, it goes much deeper. Yet more IMF money is not going to help. The central choice has long been the same; either the euro is reconstituted on more sustainable lines, with some countries reverting to national currencies, or the region must move with urgency to full debt mutualisation and corresponding political union. I'm not convinced that Europe is ready for the latter of these two possibilities.