You can see how far the euro has fallen from favour in the markets, one cynic said recently, when people start touting the appointment of a left-of-centre Italian politician as its salvation.

The prospect of a new broom, in the shape of Romano Prodi, heading the European Commission may provide a welcome boost to the credibility of the European Union in the political sphere.

But can he drag euro-zone economic policy-making, and its ailing currency, out from under a cloud?

The underperformance of the euro has been the talk of the financial markets almost since its introduction. While some of the weakness is simply because the US economy has grown more strongly, and the eurozone more weakly, than the market expected, the other cause is more worrying.

Most financial market observers agree that the euro zone, despite the conservative central bank at its core, faces an urgent problem of draining credibility. A very public conflict between the European Central Bank and euro zone politicians has helped the euro to weaken and indicated to some the presence of a large vacuum where a strategic view of the eurozone's future should be.

"The loss of credibility is a slippery slope," says Michael Wallace, manager of currency analysis at Standard & Poor's. "Once you start down the slope and lose traction, it is hard to crawl back up again."

The market's chief bugbear, Oskar Lafontaine, the former German finance minister, has departed and his resignation provoked cheers on trading room floors in London.

In currency terms, nothing in the political life of Mr Lafontaine, the propagator of what Mr Wallace calls "monetary terrorism" towards the ECB, became him so well as the leaving of it. The euro shot up 2 cents in the half hour after his departure.

But at the end of last week, it was back below the pre-resignation trough, ploughing new lows against the dollar and sterling on the day after Mr Prodi was anointed. Renewed fears of weakness in eurozone economies and an unsatisfactory deal over the EU budget, regarded by the market as the "lowest common denominator", outweighed the immediate impact of his appointment.

In a sense, Mr Prodi has nothing to lose. With no formal role over the euro, which responds more to signals from the ECB and national finance ministers than from the Commission, he cannot be blamed for renewed falls.

But if he manages to restore a degree of respectability to pan-European politics, especially in such critical areas as the budget process, he has the potential to contribute to a euro recovery.

"The market realises that the direct influence of the Commission is small," says Joe Prendergast of Credit Suisse First Boston in London. "So to regain some credibility for the euro, Prodi will have to sort out policy-making in Europe."

This may seem a tall order. It has been a perennial complaint that decision-making within the EU has been fragmented.

Even the omniscient global financial markets sometimes have trouble working out who is in charge.

When the European commissioners resigned en masse two weeks ago, the euro dived during the Asian trading session as markets assumed that no-one was minding the shop, only to recover all its losses in Europe, where traders had a clearer idea of the Commission's limited role.

But if Mr Prodi can give the impression the euro zone is the sort of place where business can be done, the markets may look upon the euro more kindly. He could also smooth over disagreements between the ECB and national governments, where tensions rumble on, most recently over what Wim Duisenberg, ECB president, called the eurozone's "disappointing" progress towards fiscal consolidation.

Alison Cottrell, chief international economist at Paine Webber, says the Commission has been "ineffectual" at policy co-ordination over the last few years. But getting the policy side right could help a euro recovery, she adds.

With a background in Italian politics, Mr Prodi should know a thing or two about fragmentation and the credibility gap. It could be that the politician who almost miraculously drove Italy to embrace fiscal prudence and economic respectability as the route into the euro is just the man to do the same for the currency itself.