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
    +5

    Comment number 42.

    It would seem that the view is that it is not the people of Euro. The driver for more intregration and the giving up of sovereign rights will have the effect of consolidating power into a narrower and narrower cliche of unelected officials A central veto over economic policy/budgets etc. means those unelected officals control the purse strings and therefore will hold the power.

  • rate this
    +2

    Comment number 41.

    #35.Little_Old_Me
    ....no economy that relies on one sector too heavily will survive long term.....Germany's is too export reliant.....

    As the UK is too reliant on financial services.
    The German economy will be doing better than the UK's in 10 years time too.
    We will still be enjoying the benefits of being the world's first post-industrial economy.

  • rate this
    +4

    Comment number 40.

    Who will dictate Europe's future? The same unelected, corrupt, dictators as now.

  • rate this
    +4

    Comment number 39.

    Some of my family live in Munich. They are constantly suprised by the lack of reporting in the UK concerning German frustration with the Euro.
    When the German people become truly fed up with bailing out profligate tax and spend economies in the rest of Europe, then EU beware. Despite your best efforts democracy is not quite dead yet... the German people may well pull the plug on the Euro.

  • rate this
    +4

    Comment number 38.

    Can someone please explain - the ECB is buying the sovereign debt of Spain etc. where do they get the funds from to do this? Ultimately is this "made-up" money, or tax-payer money?

  • rate this
    +1

    Comment number 37.

    Money talks.

    Internally, Germany and the ECB will continue to dominate.

    Externally, the relationship with China (and other trade surplus economies) and the IMF will be key - who else will provide bail outs / buy their bonds ?

  • rate this
    0

    Comment number 36.

    Wouldn't it be wonderful if whoever dicate's Europe's future was democratically elected and accountable?
    Ken Livingstone was partly right. Voting can change things - and so in Europe instead of abolishing it they just do whatever they can to prevent it.

  • rate this
    +1

    Comment number 35.

    Either Germany steps up to the plate and does what it needs to do - spread the wealth they gained from the advantage the Euro has given their economy......

    .....or the Euro ultimately sinks without a trace.....much like German's economy would......no economy that relies on one sector too heavily will survive long term.....Germany's is too export reliant.....

  • rate this
    +2

    Comment number 34.

    Interesting that SF uses the term 'dictate'; whenever the EU is being discussed 'dictatorship' is not far from anyone's lips. Van Rompu, Barroso & Co. have an inflexible view of Europe that does take into account the wishes of the people or external dynamics and power shifts in the rest of the World.

  • rate this
    +17

    Comment number 33.

    As much as I regret it I think Europe is slowly moving towards a revolution as other have said governments and the EU have let citizens down, have allowed greed particularly from the global banking sector and created too much dependency. Add offshoring of work to China, India, Turkey, Brazil etc and creating mass unemployment the cork is waiting to pop.

  • rate this
    +9

    Comment number 32.

    The bailout pot is sizeable, but not inexhaustible. Spain may avoid a bailout for some time, but the tipping into recession of the zone means that others, apart from Greece, will have to hold their hands out. Few, if any, of the existing debts can be repaid. It is like the Titanic scenario, with one compartment flooding after another. The verdict will come when the pot runs out.

  • rate this
    -12

    Comment number 31.

    The pivot state will be the UK. When we withdraw from the EU the rest will group better together and prosper. The issue is not austerity or prosperity but rather who will lend money against the business plan on offer from any country. Investors know that management and cohesion are the key discriminators between business plans. The UK is a downward drag on the EU - without us it will fly.

  • rate this
    +1

    Comment number 30.

    The French people have a rich history of direct action. If anyone will force change it will be as a result of their anger. Not sure what the trigger will be but this time their example could well spread across the continent.

  • rate this
    0

    Comment number 29.

    @22

    This.

    Even dictatorships, which the EU is not, require the the consent of the masses to survive.

    It's up to the people of Europe whether or not the Euro survives and if so in what form.

  • rate this
    +5

    Comment number 28.

    Monetary union without political union is not viable. The people of Europe have never had a vote on either and the longer their voice is unheard the more strain will show. It's hard enough to take austerity from one's own governement but Greeks, Spaniards, Irish are being asked to take the medicine from Germany. The political classes across Europe have failed big time. There will be a reckoning.

  • rate this
    +4

    Comment number 27.

    Emerging markets will dictate the future of Europe. They are the ones with the power and money to set the rules of trade. Europe suffers from delusions of grandeur, and the sooner we realise that the better. We in the UK need to form close relationships with Brazil, China and India, and loosen ties to the United States.

  • rate this
    0

    Comment number 26.

    How long before the police sick of cuts grow tired of shooting rubber bullets and tear gas and their brothers and sisters.They will join them unless change is afoot. After that marshall law gets declared next a coup follows (thats if there are troops available,lot of wars around).It will start on the less stable fringe states and spread west. Best hope is do something now words wont save the euro!

  • rate this
    +2

    Comment number 25.

    Probably bankers. A bunch of them.

  • rate this
    +4

    Comment number 24.

    You can guarantee that it won't be the people. The only hope we have is for the EU to collapse under the weight of its own corruption.

  • rate this
    +5

    Comment number 23.

    "the socialist president of France may well be the European politician who has the most say in dictating the future of the euro"....Mmhh, I don't think more than half of the French Population would agree on that...they bitterly regret their decision and a considerable amount of French is leaving the country....

 

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