Who will dictate Europe's future?

French President Francois Hollande French President Francois Hollande is set to have a key say in dictating the future of the euro

Which country holds the key to the euro's fate? Which of the 17 members will turn out to be the "pivot state" - the country around which the future of the eurozone will turn?

I spent most of last weekend thinking about the future of Europe with economists, politicians and senior policy makers at a two-day seminar organised by the Centre for European Reform. (I know, I get all the fun.)

One way or another, this question kept on coming up - maybe because it's a useful way to think about the different paths which the euro could take from here.

Two years ago, you might have said Greece was the pivot state. Policy makers were convinced that a Greek exit from the euro would be the end of the whole thing. The effort to save the euro boiled down to a massive effort to keep Greece in.

Not any more. I don't speak to many City folk or European policy makers who are confident that Greece can stay in the single currency. But I would say a majority are fairly convinced that the euro will survive - even if some of them wish it were not so.

Ask the same question now, you might get "Spain" as the answer. The new confidence around the euro stems largely from the ECB's commitment to Outright Monetary Transactions (OMT) - to acting as a backstop for countries in the markets by buying their government debt. Spain is the country that programme was designed to help. So how and when it gets that help might well determine how this stage of the rescue strategy works out.

Longer term, though, you have to wonder whether we will continue to be quite so focussed on Spain. After all, it's not Spain that is responsible for 57% of the sovereign debt of the troubled eurozone economies - it's Italy. And come the spring, Italy will be looking for a new prime minister.

In their punchy new book, Democrisis, David Roche and Bob McKee say Italy is the "circuit-breaker" that could make a lot of the crisis go away: "Italy represents more than half of every form of measurable economic contagion of the eurozone sovereign debt crisis... If the markets believe Italy is 'saveable', a virtuous outcome is possible and contagion will go into reverse."

That makes Italy sound very much like the pivot state: the country whose future could dictate everyone else's. The fact that an Italian now runs the European Central Bank is the icing on the cake.

You might ask where Germany fits in all this. After all, we're used to thinking Germany holds the euro's future in its hands. But the notion of a pivot state goes beyond sheer power, or economic heft - the pivot state isn't necessarily or even usually the biggest country. Rather, it's the fulcrum that helps to tip history one direction, or another.

There is one large nation that I hear investors and policy makers talk about more and more as the pivotal state of Europe - but it's not Germany. It's France.

It's still possible that events in Spain or Italy will determine whether the euro survives. But if it does last, France is most likely to determine the kind of eurozone it is, and whether Germany and its people feel happy to play along.

Almost without anyone noticing, France has become an even more state-dominated economy than it was 30 years ago, with government spending of nearly 60% of GDP and a tendency to raise taxes first, and talk about spending cuts a lot later.

Many in France - including on the right - think that combination is sustainable, thanks to French companies' world-beating manufacturers. In some key sectors, they are truly second to none. France also has much better demographics, looking ahead, than either Germany or Italy.

But Chancellor Merkel does not take such a sanguine view. And nor do many international investors.

That is why market watchers and not a few German officials were paying very close attention to President Hollande's big press conference last Tuesday. They want to know whether he can combine concrete economic reform with his call for less austerity. If he does not, then Germany knows that the harsh budget arithmetic in the new Stability and Growth Pact will not add up even for France - let alone the likes of Spain.

For all these reasons, the socialist president of France may well be the European politician who has the most say in dictating the future of the euro - especially after next year's German election.

To be clear, I think the euro will probably survive. But history may judge that it was President Hollande who decided, in 2013, whether Europe was going to have a squidgy, Latin kind of monetary union - or the austere Germanic one described in the new fiscal treaty.

Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this

    Comment number 22.

    The people they will decide. One way or another they always do.
    politicians come and go and Empires crumble. The people are the constant and when have had enough change follows.

  • rate this

    Comment number 21.

    The Germans.
    WW3 will not be fought with weapons. It will be fought financially and politically and the Germans will finally rule europe.
    Not a direct quote, but one of the major Allied leaders of WW2 made a similar statement and it seems to be running in that direction.
    Maybe it's paranoia, but the news points it's nose in that direction.

  • rate this

    Comment number 20.

    Perhaps one of the key issues is the disconnection between those driving the eu and euro project, and the people.
    While there are tangible benefits to be enjoyed, trade and visible infrastructure improvements, fine, but people are influenced by now and the perceived future, not yesterday.
    Election timetables may be the most important issues.
    Hollande may also find reality intruding again.

  • rate this

    Comment number 19.

    Who will dictate Europe's future?

    Let us hope The People of Europe on the basis of one man* one vote.
    * man includes both genders.

    Not some jumped up popinjay!

    Give all Europeans the vote for the next President and Executive.

    I know journos like to think that personalities are more important than the people but they are wrong and we all must make sure they are wrong! (Shameful headline Stef!)

  • rate this

    Comment number 18.

    The leaked Van Rompuy plan for eurozone makes excellent reading. Why bother having a summit at all for he and his unelected bureaucrats have decided what the outcome is going to be. If this is what the United States of Europe is going to be then I fear for all of our human rites.
    This is not democracy in any shape or form and as such is becoming more of a dictatorship.

  • rate this

    Comment number 17.

    Goldman Sachs and other global financial institutions.

    Ask not what your bank(s) can do for you rather what you can do for your bank(s).

    Yes we can if they say it is ok to do so.

    Steph Please learne lessons from recent history - let the scales fall from your eyes.

    The banks have taken over goverments - Social Darinism is that.

  • rate this

    Comment number 16.

    Maybe it's the UK. What would be the effect on the EU of a UK departure ? With the majority of the EU states being net receivers from the EU budget is there the stomach amongst particularly the germans to dip their hands even further into their pockets to fund this club ?

  • rate this

    Comment number 15.

    The rules of maths and accounting will dictate the future. That and whether enough countries are prepared to keep subsidising the spending and lack of global competitiveness of others on a scale which keeps them all solvent and reasonably happy.

  • rate this

    Comment number 14.

    I would have thought by now you can only try and fail at that.

  • rate this

    Comment number 13.

    The rich.

  • rate this

    Comment number 12.

    Perhaps it will be Scotland(!), if they vote to leave the UK and, coincidentally, the EU as well, the Anglophobes across the channel may well take the opportunity to kick England+ out as well. That will change the dynamics considerably. I wonder if Nigel Farage will campaign for a Scotland out vote? That's one rederendum that is going to happen.

  • rate this

    Comment number 11.

    This report shows how pivotal roles can change over time. it could well be that all or none of the above are the pivotal point. there are alot of angry people in greece, spain and italy. what's to say that there isn't an uprising in austerity which brings the eurozone back to the brink and straight over the edge. the future is not ours to know.

  • rate this

    Comment number 10.

    Who will dictate the future of Europe?

    The banks and the markets.
    They will be the ultimate future paymasters.

  • rate this

    Comment number 9.

    6.Eddy from Waring
    I agree I think that mantel will be taken over from the more resent members who want their chance to get their snouts in the trough. France is not in too strong a position to make a play but that's never stopped them in the past. The only thing is that the difference between them and Germany may well raise their ugly head.

  • rate this

    Comment number 8.

    Who will dictate Europe's future?

    GERMANY !!!

    Forwards to victory !!!

    (the title of the thread said it all really didn't it? lol)

  • rate this

    Comment number 7.

    It simply doesn't matter - the people of Europe, all over the continent are seeing the EU for what it is. There is going to be a referendum in the UK on membership regardless. The people will have their say - and when they do we will leave the EU and it will collapse with the eurozone. Then and only then will there be a recovery.

  • rate this

    Comment number 6.

    Oddly, up until recently, in a negative way, the UK has affected progress in the EU, perhaps more than any other state.

    I think those days are well and truly over though.

  • rate this

    Comment number 5.

    "the socialist president of France may well be the European politician who has the most say in dictating the future of the euro" Where did that one come Steph? Was there a late party at that DO

  • rate this

    Comment number 4.

    I agree that France is the pivotal member. But I wonder how tolerant the French electorate will be towards current policy? Somehow I think that President Hollande will be out at the next election. Then what?

  • rate this

    Comment number 3.

    The strongest and largest economies.....

    The tail will not wag the dog......

    If they do then it will surly bring to and end this club.......


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