Europe after the euphoria

Greek papers headlining EU summit Public anger at austerity in Greece is echoed in other eurozone countries

Maybe it was the lack of sleep, or that expectations had been exceeded, but there was a whiff of triumph in the post-summit statements at 4am last Thursday.

The heady comments continued into the day, with French Finance Minister Francois Baroin declaring that "the euro has been saved".

Inevitably, a more sober assessment has followed. It is not so much that nothing was achieved - it is more that no one is quite certain what will sustain. The agreement has left a whole raft of questions.

Over Greece: Will the banks volunteer for 50% losses? Many will because of the sweeteners that have been thrown in. The Institute of International Finance believes 90% of banks will agree. But some won't. They cannot be forced to accept losses, because immediately that would become a default. And, in any event, there may be legal challenges to the losses. So the take-up remains unknown.

Then there is Greece itself. Certainly the country has been relieved of a chunk of debt. But the country has turned hostile towards austerity measures dictated from abroad. There is a dangerous mood of resentment and resistance. It revealed itself at the weekend, when the president was forced to abandon his appearance at a national day ceremony as part of the crowd shouted "traitor!"

Few believe that Greece will be able to deliver on its commitments, and further funding will be required. Even on the best-case scenario debt will only fall to 120% of GDP by 2020. Greece is staring down a long road of hardship.

Tapping into surpluses

Then there's the EFSF - the eurozone's main bail-out fund. It has been ramped up (leveraged), or so we are told, to one trillion euros - but no one can explain how the EU gets to that figure. The Europeans are not putting in more of their money. An expanded fund will be hugely dependent on China, Russia, the IMF, and they have yet to declare their hand.

The speed with which President Sarkozy called China to try and tap into their $3.2tn reserves underscored Europe's weakness. The main challenger in the presidential race in France, Francois Hollande, warned that the Chinese would demand something in return. European officials have long pursued influence on the world stage. As so many countries demonstrate, influence comes with economic power.

So on to Italy. The fund - even at a trillion - is not enough to protect Italy if it gets into difficulty. Its borrowing costs are currently unsustainable. Next year it needs to finance 300bn euros of its 1.9tn euro debt.

Silvio Berlusconi arrived at the summit with a 14-page letter of promises to reform the Italian economy. "Will Italy do what it promised?" asked the German Finance Minister Wolfgang Schaeuble. It did not boost confidence in the Italian leader when he referred to the euro as a "strange currency" that had "not convinced anyone". Even if Silvio Berlusconi has the will to reform does he have the credibility to push change through?

There is a very real danger that the Italians - like the Greeks - will resist cuts in wages and benefits.

And all bets are off if Europe does not start to grow again. Certainly the indications are that next year the European economy will shrink.

Perhaps the most revealing insight into the challenge that Europe faces was provided by President Sarkozy in a TV interview when he got back to France. He spoke candidly, telling the French people that "we have entered a new world". France, he implied, had to become more like Germany.

"We spend too much and we must work more," he said. The French social model could only be defended if tough measures were adopted. I recall the strikes and disruption when the French retirement age was increased from 60 to 62. Will France be ready for this new world?

But perhaps the most profound legacy of the summit is that the EU is dividing into two camps: those in the eurozone and those outside.

The Germans are now openly talking of fiscal union and no one knows how far that will go. Will it end with a common European treasury, common taxation and budgets? With such economic integration the eurozone countries would inevitably start agreeing policies that would impact on the European Union as a whole, including the single market.

Watershed for EU

The UK is determined to resist any loss of influence, but fundamental change is on its way. Prime Minister David Cameron knows that Britain's place in Europe has shot up the political agenda. He says the future holds "greater opportunities for a greater rebalancing of powers", but the debate is likely to go further than that.

Changes to the EU treaties will surely spark a wide debate about the future of the union. In some countries giving up control over tax and spending will lead to demands that voters should have their say. Will voters want to live in a very different union? Will Europeans accept that, in order to compete, their welfare state will need significant and painful reform? Can they afford the social model that was built up over the past 50 years? Is the EU - with its single market - part of the solution or does it reduce competitiveness?

A step has been taken towards solving the eurozone crisis, but it is stirring deep questions - not just about the debt crisis but about the future of the European project itself.

Gavin Hewitt, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 1.

    " The UK is determined to resist any loss of influence, but fundamental change is on its way."

    -- Another more realistic analysis has two-tier EU --with Britain in the 3rd.

    -Gavin should read ´between the lines´ !

  • rate this

    Comment number 2.

    I think that Germany lost the war but is now winning the peace, will those countries who join fiscal union want to be ruled by Germany, because that is what will happen when they lay down the rules to wipe out the debts of those countries that have overspent, if they think the austerity measures now in place are bad, wait till they get the new ones.

  • rate this

    Comment number 3.

    Greece is doomed, the euro deal will not be accepted, the Pigs will not pay 100% back when Greece is only paying 50% and will still not be able to repay thier debt.

  • rate this

    Comment number 4.

    The white elephant in the room is that the deeper Europe falls into this crisis the more integrated it becomes - the line between budgetry decisions, responsibiltiy and subsquently accountability now resides firmly outside the sacred grounds of national governance. Our hands will be bound, at which point integration will arrive as a pre-determined solution.

  • rate this

    Comment number 5.

    GH: "The heady comments continued into the day, with French Finance Minister Francois Baroin declaring that "the euro has been saved".

    I recall another European politician boasting much earlier that he "secured peace for our time".

    Has euro been secured now as effectively as peace was then?

    Perhaps some details will be finally revealed at G-20 summit.

    Although not by the Chinese.

  • rate this

    Comment number 6.

    Why does the BBC hide one of the biggest issues facing the world under a tab for 'World' then 'Europe' then one article from GH? From the rest of the website you would not know that the EU existed. Burying bad news, on behalf of whom I wonder? Blatant Censorship by stealth! And again from the nameless 'Moderators' - how very USSR!

  • rate this

    Comment number 7.

    Another meeting, another fudge. In all the time the politicians have been talking the inevitable has merely been delayed

    Sovereign debt is still rising and Greece is a basket case which the Euro-taxpayer is expected to 'save'

  • rate this

    Comment number 8.

    If the Conservative government wants to oppose further integration into the European Union, then this will not be a position that is shared with the 17 core states. The process of integration requires compromise and is difficult. Reducing integration is much easier.

    A two speed Europe makes the organisation weaker. I can see political opportunities for the Conservatives here....poor EU :-(

  • rate this

    Comment number 9.

    Hedge funds already invented ways to profit from last week's farce.They'll buy Greek bonds from banks for slightly more than banks will get and hold the ECB hostage by demanding 100%.The difference is their profit. Failure to pay triggers the dreaded CDSs.Outgoing head of the ECB warns this haircut must be a one time thing but once may be too much.Why would investors believe it won't happen again?

  • rate this

    Comment number 10.

    Bloomberg Editorials Oct 17 and 31 2011 say it all:

    "Insufficient growth; Betting on incremental rescue; Insufficient war chest; Insufficient writedowns; Greece and Portugal need to default; Absent fiscal unity; Absent bank-capital reform; Absent fundamental issues; Treaty changes take years; Absent non-Europe countries; Investors will refuse to lend; Speculators will not be daunted…"

  • rate this

    Comment number 11.

    All to be present at the G-20 will have by now read (with nuances ?) Merkel´s speech to the Bundestag. The tone has now been set.

    Britain can pick up the gauntlet and cosy up to the USA -- but it should be aware that Merkel has many, many allies within the EU and Eurozone and risks losing the little ´respect´ it has remaining in Europe.

    -- Poland wants the Euro -- only Sweden remains as ally.

  • rate this

    Comment number 12.

    "It did not boost confidence in the Italian leader when he referred to the euro as a "strange currency" that had "not convinced anyone".
    Thereby proving that truth is not welcome in an EU summit.

    The EU social model is unlikely to be viable - changing it will be painful

  • rate this

    Comment number 13.

    When governments and countries overspend and the deficits are not tackle only bankruptcy can ensue.

    Inflating your war out is not and answer, if you don't earn enough today, by reducing the amount you get paid you will only have to work harder the next day to stand still.

    The spiral needs to be changed.

  • rate this

    Comment number 14.

    Why would we want deeper engagement with the eu?

    Trade is global, products and services constantly and quickly changing. We need to be inventive and quick to respond.

    Will huddling together in a bloated protectionist eurocracy that has brought Europe to it's knees with a failing currency experiment help? Portugal and Greece are already in administration.

    Germany won't fund this forever.

  • rate this

    Comment number 15.

    EU = Corruption, Greed, Stupidity, Ignorance & Incompetence.

  • rate this

    Comment number 16.

    The euro is saved - but for how long? The most optimistic analysis reckons until 2012, providing there are no further credit rating reductions for member countries (quite possible), and no one else demanding the same debt write-offs as Greece (Very possible). A sorry lack of political honesty about this hopeless lost cause.

  • rate this

    Comment number 17.

    This has 2 pages -- not for the lazy.

    ´German dominance of Europe´,1518,794970,00.html

  • rate this

    Comment number 18.

    Everybody is talking about leverage. Couldn't it be, that a word of the German Government has some weight, and might be, in combination with the strong will of Scandinavia, France, Benelux, Austria, indeed a long enough lever to secure the Euro?

    There is no undeserved German domination, just a highly populated country in the center of Europe with sound econonics and it's natural influence.

  • rate this

    Comment number 19.

    And when Italy fails to deliver,,, and Portugal and perhaps Spain too? And within a year or so Sarkozy and Merkel out of office? The Euorozone will look very different - if it exists at all.

    Why at this point will the UK lose out if it fails to join an organisation that seems determined to bankrupt itself and plunge a substantial proportion of its populace into long term penury?

  • rate this

    Comment number 20.

    If the EZone becomes one state, the peripheral areas will take min. 30 years to match German productivity. They may never succeed. Germans would have to accept reduced living standards, as their average income tended towards a lower one-state median av. and their wealth was sent to other areas. Never happen.


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