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Fear and the euro

Gavin Hewitt | 16:22 UK time, Tuesday, 16 November 2010

Panic is not the right word, but fear lingers in Brussels's corridors and in some capitals.

The fear is that the crisis in the eurozone - far from ebbing as many times predicted - remains acute.

You can sense the alarm today's comments by European Council President Herman Van Rompuy. He called it a "survival crisis". He urged: "We must all work together in order to survive with the eurozone, because if we do not survive with the eurozone, we will not survive with the EU." It is, of course, a debatable point. The EU survived before the advent of the single currency.

Shop window in Dublin advertising liquidation prices, 11 Nov 10

But this was a threat: that the Irish debt crisis could bring down the whole EU. This stark message was intended to scare states and leaders into coming up with answers.

In Germany, Angela Merkel too has been playing on fears. The German chancellor said: "I'm telling you, everything is at stake. If the euro fails, then Europe will fail. And with it fails the idea of European values and unity."

It is hard to know whether Mrs Merkel believes this to be literally true. But her intention was also clear: to rattle those within her own party and elsewhere in Germany who are in increasing numbers beginning to question the point of the European Union.

What has turned public opinion in Germany is the bail-out of Greece and the setting up of a so-called stability mechanism. It is sometimes forgotten - but not in Germany - that when the Deutschmark was given up there was a commitment that other countries would not be bailed out. Many Germans do not want to become the paymasters of Europe, but Mrs Merkel was trying to give herself some room for compromise. More German money may still be needed to resolve the euro crisis.

In this atmosphere of frayed nerves Europe speaks with many voices. The Economy Commissioner, Olli Rehn, warned today of "existential alarmism". He believes that such comments do not help. He expressly contradicted President Van Rompuy when he said the current crisis "is not a matter of survival of the euro".

And then in the wings the Greek leader, George Papandreou, accused the Germans of forcing countries towards bankruptcy. He said German tough talk that private bondholders could suffer losses in any future bail-out had pushed up borrowing costs and could "break backs".

The focus of the current crisis remains Ireland. Having spent the last 36 hours in Dublin I can report a sense of deep resentment at the pressure being put on the Irish government. Ministers genuinely believe they have a strategy that can work. They want time to deliver their budget on 7 December. That will set out the spending cuts and the tax increases to deliver a further 15bn euros (£13bn) of savings over the next few years. They also say that growth next year could be 2.5%.

Now in these fractious times all kinds of people are insisting they are not putting pressure on the Irish. The European Commission, for one, says its hand are clean.

Fingers point at the European Central Bank (ECB). They deny it too. Only the Portuguese and the Spanish are openly leaning on Dublin. The Portuguese say they are suffering from higher borrowing costs because of doubts over Irish debt. They say they might be pushed into asking for a bail-out. The Spanish Treasury Secretary, Carlos Ocana, pressed Ireland to come to a resolution quickly to end market uncertainty.

What is happening is that Ireland is being told to accept some kind of rescue for the good of the euro.

The problem for the Irish government is that it not only believes a bail-out is unnecessary - it fears humiliation, the stigma of having once been the Celtic Tiger but now needing to be rescued.

"There's no reason why we should trigger an IMF or an EU-type bail-out," said the Irish Europe Minister, Dick Roche. The pain would be less if the bail-out was just for Ireland's banks, which lie at the heart of its difficulties. The banks are having difficulty finding operating cash.

David McWilliams, an economist and the author of The Pope's Children (his account of Ireland's years of excess), said Ireland's only card was to admit defeat and essentially say that Ireland's problems were Europe's. That is one option, but it would amount to Ireland surrendering financial independence.

Something will give. The European Commission is holding talks with the IMF and the ECB. There are those who say that failure to reach agreement during the current meeting of European finance ministers could agitate the market and push up borrowing costs further.

The biggest concern is the domino effects - that Portugal won't be able to raise sufficient funds because of the cost of borrowing. If Portugal had to be bailed out the markets might question whether Spain could service its own debt, considering it has almost zero growth. The EU's bail-out mechanism may be able to handle the debts of Greece, Ireland and Portugal, but Spain would be altogether a different matter.


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