Europe dithers as Greece vote looms

  • 24 May 2012
  • From the section Europe
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EU heads of state in Brussels (232 May 2012)

Europe is divided and uncertain and the euro - at least initially - has fallen to a 22-month low against the dollar.

Its leaders spoke for six hours but the decisions have been put off until another summit at the end of June. This was an informal dinner "without taboos" but Europe may not be granted the time to talk rather than act.

Greece was not formally on the agenda but it overshadowed the meeting.

The leaders pledged to do everything to keep Greece in the eurozone but as Chancellor Merkel said: "We expect them to stick to their commitments."

There was no new strategy to stop Greece leaving if it votes for candidates in the forthcoming election who oppose the austerity measures that are the condition for the bailouts.

There was an ill-defined offer to divert some EU structural funds to Athens in order to boost growth.

Quite deliberately, European leaders want the Greeks to realise they could end up outside the euro and that this prospect will give them pause for thought. There are some indications that this strategy might be working.

In the meantime countries are advised to make contingency plans for a Greek exit, in particular how to protect the banking sector.

In Brussels the working assumption is that Greece will remain in the eurozone but privately officials say they will have to try to make any departure orderly if it happens.

Ideas for growth

The main focus of the meeting was how to boost growth. The leaders denied that there was a choice between austerity and growth. Both, in their view, are needed. Deficits have to be reduced but growth is essential.

Some ideas have momentum behind them: using EU structural funds for infrastructure projects, expanding the single market, giving a trial run to so-called project bonds where private investment is attracted to invest in new transport links and the digital economy.

The Germans remain convinced that freeing up labour markets and easing regulations would have the biggest impact.

German Chancellor Angela Merkel (23 May 2012)
The German chancellor believes eurobonds are not an instrument for growth

The new French President, Francois Hollande, did raise the issue of eurobonds - common European debt.

This would bring down the borrowing costs for the weaker countries whilst Germany would end up paying more.

Mr Hollande probably had a majority of countries supporting him - at least the Italian leader thought so.

Angela Merkel was not isolated, however. Her view is that eurobonds would remove the incentive for countries to behave responsibly. She also believes that eurobonds are not an instrument for growth.

For the moment the plan for eurobonds has been parked in the long grass.

Standing up to Berlin

This debate was "frank" although not "confrontational", said Mr Hollande.

However the Franco-German relationship that has always been the motor behind European integration is being redefined. Mr Hollande no longer wants a duopoly.

French President Francois Hollande
Mr Hollande avoided a pre-summit meeting with the German chancellor

He doesn't want his relationship with Germany to be like an executive board imposing itself on others. So he avoided the pre-summit meeting with the German chancellor.

In the past Angela Merkel and Nicolas Sarkozy would meet beforehand and agree a joint position that would carry the day.

They would also work the room as a partnership. Yesterday, the French president and the German chancellor were noticeably cool.

They may warm up (it happened with President Sarkozy) but Francois Hollande is signalling that he is quite prepared to stand up to Berlin.

There is a frustration at the slow pace of all of this.

David Cameron questioned the purpose of all these meetings whilst the central questions remained unanswered: who or what at the end of the day really stands behind the single currency? And where is the rescue fund or firewall to prevent the Greek crisis spreading to Italy and Spain?

Britain's Deputy Prime Minister Nick Clegg will say in Berlin today 'the tree is falling, and we are pruning one leaf at a time".

Europe does not have time.

The banks are under pressure. Recession is deepening. Unemployment growing. Spanish Prime Minister Mariano Rajoy warned yesterday that Spain might not be able to continue with the borrowing costs at the level they are.

For the single currency and the European project these are days of uncertainty.