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The Relief of Athens

Gavin Hewitt | 16:39 UK time, Friday, 26 March 2010

German Chancellor Angela Merkel with European Council President Herman Van RompuyIt was the morning after the night before and I was riding an elevator to the 13th floor in the European Commission. Two men smiled at each other and one said "I hear Greece has been saved". "Couldn't be better," beamed the other, before disappearing into the vastness of bureaucracy. It felt like news shared from a distant front: "Bastogne has been relieved" or "Malta is holding out".

And then to sit at breakfast with the President of the Commission, Jose Manuel Barroso, who began by describing himself as "extremely happy". The single currency, in his view, was "one of the greatest achievements of European integration" and it had been rescued. "Common sense," he declared, "had prevailed," and he exhaled, an official satisfied.

And later to hear the President of the Council, Herman Van Rompuy, speak of the "courageous act" that had given birth to a deal. These encounters gave a glimpse of the largely unspoken fear that had rippled through the corridors of Euroland - that the crisis over Greece and its debt could threaten the European project.

The rescue of Greece grew out of a meeting between President Sarkozy of France and Chancellor Merkel of Germany. They are not natural soulmates. You don't get the impression that the French president warms to Germany, and Angela Merkel struggles with Sarkozy's unpredictability. Yet the two need each other. As one very senior official said today, "Europe requires Franco-German cohesion. You need them for European decision-making. They are still crucial."

So, after a week or so of sniping at each other, they traded. Merkel got the IMF involved.
It lessened the burden for the Germans and the IMF is in for between 10 and 20bn euros. If loans had to be made Sarkozy wanted the eurozone to be the dominant partner. He got that. The countries that use the euro will provide two-thirds of any loan. Although many senior officials are not theological about involving the IMF others are acutely sensitive at the very idea that the euro needs outside help.

The French president also got written into the draft a phrase that mentioned "the economic government of the European Union". It was the Irish, initially, that choked on the words. The Dutch and the British were not far behind. Officials emerged to say there had been "asymmetrical translation" and the word "government" was replaced by "governance".

In truth the Germans and French mean different things by the words "economic governance". The Germans want a tougher regulatory regime that won't tolerate cheats. The French want to see closer economic co-operation.

The immediate result of this deal is that Greece is given some space to breathe. It has to find 54bn euros this year, but already the cost of its borrowing has come down. One union leader has announced that strikes will be called off.

Yet no one imagines the crisis is past. Tax evasion is rife in Greece and the black economy accounts for about 20% of economic activity. Only this week in Athens a woman told me of having to hand over 100 euros to a doctor in a public hospital just for doing his job. The Greek economy is contracting and the cuts will only reduce demand further. The Greeks have not asked for funding so far, but don't bet against it in the future.

But after all the celebration over the relief of Athens some truths remain. Almost every economist sees flaws in the euro as a currency. It is difficult having monetary union without fiscal union. That has not been resolved. Secondly, the differences between the economy of Germany and those of the countries in southern Europe have not been narrowed.

Germany has put down a marker that it will not accept a club where bail-outs become the norm. Angela Merkel has insisted that she wants a treaty change that will allow for tougher sanctions with perhaps the ultimate penalty of expulsion.

There is little appetite for this. One senior official in the Commission said they did not want to open up treaty negotiations because they feared the Conservatives in Britain - if they get into power - would use the negotiations to try and repatriate some powers back from Brussels to London.

So, after these days of in-fighting, the question remains "what kind of Europe does Germany want?" There is a recognition that the mood there is changing and that the national interest may often trump the European interest. Europe will have to adjust to that.

There is pressure on Germany to stoke up demand at home to help weaker countries in Europe with their exports but Mr Van Rompuy is one of those who doesn't go along with this. His analysis is unusually candid and clear. He believes it's unrealistic to expect Germany to boost demand at home. He thinks it is up to other countries to put their houses in order. At least half of Germany's surplus has nothing to do with Europe. There is also a culture of high savings.

Countries like Spain, on the other hand, are struggling with low growth because they have an inflexible labour market and the political class there knows that.

That perhaps is the biggest threat to prosperity and the so-called "European way of life"; poor growth. Where will the new jobs come from? For the next few years country after country will be reducing their deficits, cutting spending, reducing demand. So how will the long lines of 24 million jobless Europeans be reduced?

Already there is talk that, although European countries are supposed to reduce their deficits to 3% of GDP under the Growth and Stability Pact, it may not happen. The strains on civil society might be too great. So although Germany is demanding greater discipline there is reason to doubt that all the savage cutbacks will actually be implemented, for the crisis in Europe is growth.

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