Europe's long, uncomfortable summer

 
Tourists and locals sit in restaurants on Monastiraki Square in Athens Greece may get a new government, but the crisis seems certain to return later in the year

Events, with all their unpredictability, are driving the European crisis. Europe's leaders have plans, but they are not in control.

They react, but they cannot manage this crisis. They repeatedly make mistakes because they do not understand the crisis they have created.

When Spain's banks needed rescuing European officials allowed themselves a moment of congratulation.

They had not just acted decisively, in their view, but in coming up with 100bn euros (£81bn; $127bn) they believed they had drawn a line under the problem.

The Spanish Prime Minister Mariano Rajoy said: "The credibility of the euro won, its future and the EU".

Within hours, outsiders realised that this 100bn euros was a loan which would add to Spanish government debt.

The bank bailout was an admission that Spain itself could not protect its banks and therefore exposed its own weakness. So a bailout of the banks has only deepened the Spanish crisis.

European officials veer from one favoured remedy to another. At one stage it was building up rescue funds. For a period, the emphasis was on common debt, eurobonds. The current favourite is a banking union.

Trapped

Already, expectations for the summit at the end of next week are being downgraded. The President of the European Council, Herman Van Rompuy, has hinted that no definitive measures will be agreed. It would be more about setting out a roadmap.

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Europe ... understands that an entirely different eurozone and European Union may be needed to save its currency but it shies away from a 'big leap' that might not have the backing of the people”

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"Even if we, in June, will not take definitive decisions, the path and trajectory are very clear for everybody," he said.

So there will probably be agreement on the need for greater supervision of national banks. The much more sensitive issue of a joint bank deposit guarantee is for the longer term.

And that brings us to the dilemma at the heart of the crisis. The eurozone is made up of 17 different countries that still see their identity in the nation state.

None of them have voted for a full fiscal union - where tax and spending are decided at European level - let alone a political union.

And yet, many of Europe's leaders believe the single currency can only be saved by much closer integration.

Germany's Chancellor Merkel believes that only with fiscal and political union can the zone consider common debt.

The mood, however, in Europe is not in favour of further integration. Parties wary of a centralisation of power in Brussels have performed well in the polls.

UK Prime Minister David Cameron understands the dilemma. Speaking in Mexico, he said: "It was very difficult politically to take the steps that are required economically."

And so Europe is trapped. It understands that an entirely different eurozone and European Union may be needed to save its currency, but it shies away from a "big leap" that might not have the backing of the people.

So the frustration. It bubbled over yesterday when the President of the European Commission, Jose Manuel Barroso, said in Mexico: "We are not coming here to receive lessons in terms of democracy or in terms of how to manage our economy."

Europe's leaders like to say that the crisis started in America in 2008 and not in their own backyard. It didn't. The crisis started when the criteria for joining a single currency were fudged, allowing in countries like Greece.

But the real roots of the crisis lay in such different economies sharing the same interest rate. It led, in some countries, to unsustainable bubbles that the crisis in 2008 only exposed.

The dilemmas are not just fundamental.

France, later this month, will receive a report from its auditors on the true state of French finances. Almost certainly, France will need to make extra savings this year and next.

The honeymoon period for President Hollande will be truly over. What will the champion of "growth first" do as he struggles to live up to his commitment to reduce the deficit to 3% by next year?

Cost of the crisis

Greece is fundamentally unstable. The political turmoil has meant that it will fail to meet its budget targets.

Further savings are due whilst its economy is in freefall.

Will Europe loosen the strings and give Athens more time to balance its budget? It is another dilemma.

Some, like the Austrian chancellor, say that "one should also give the Greek population air to breathe".

Angela Merkel, however, says "there can be no loosening of the reform steps". The Greek crisis almost certainly will return later this year.

The fundamental questions for the eurozone lie unanswered. What, in the final analysis, stands behind this currency? How will large countries like Spain and Italy be saved if they get into trouble? Where will growth come from, without which there can be no solution?

And, at the end of the day, will Chancellor Merkel persuade the German people that they will have to pay - vast amounts - to save the euro? And will Europeans be willing to sacrifice democracy if that is the price of ending the crisis?

The dilemmas of the European summer.

 
Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    0

    Comment number 255.

    @#254 Lucy is right. Here's a link that explains it. http://www.frumforum.com/states-cant-go-bankrupt/

    Basically, there is no legal basis for states to go bankrupt. Worst case, they can become insolvent in which case the Feds would bail them out. That's only happened once and the state later repaid its debts.

  • rate this
    0

    Comment number 254.

    240. LucyJ
    "In USA our states cannot go bankrupt"

    Are you sure? Municipalities, cities and counties certainly can go bankrupt in the US do States have some kind of legal protections?

    The problem in the EZ isn't that they are countries, it's that they are no longer sovereigns and therefore not able to decide the value of their own currency.

  • rate this
    +1

    Comment number 253.

    237.quietoaktree

    "Europe (incl. UK) and its citizens have failed"

    ===

    I'm touched that you describe us constitutionless UK subjects as "citizens".

    However, I'd say that above all, it is "we" who could have done better, by engaging with democracy, and taking matters into our hands. But no, "we" let Rupert Murdoch tell us what to think and do...

  • rate this
    +5

    Comment number 252.

    247 Lucy

    "We are in different situation than Greece, Italy, Spain, more globally connected- we're a 'Megacountry'
    =
    Bigger empires have failed before you - I'm afraid size makes no difference.
    In the case of Spain they had one of the biggest and wealthiest global empires ever. Ditto Italy (Rome), Greece and Portugal ruled over huge chunks of the then known world.

    All gone now.

  • rate this
    -3

    Comment number 251.

    250.margaret howard Was he an adopted child going to Cambridge ? I would never thought you would allow your own child to attend an ENGLISH University?
    Your love for the euro is based on the Banks refusal to accept your son's foreign currency? smiling

    feel free to answer my other blogs when you have consulted Wikipedia Margaret....I'm in no hurry.

  • rate this
    +2

    Comment number 250.

    Lucy cont

    As for placing foreign coins in scrapbooks - my son like many of his contemporaries went interrailing before going up to Cambridge university which meant visiting a dozen countries or more. Too many coins for that and the banks refused to take them.

  • rate this
    -3

    Comment number 249.

    247.LucyJ, Australia's debt is circa $300 billion dollars with a population of 22million .....not exactly clear of debt?
    248.margaret howard ; Speaking different languages is not a problem? yet employing different currencies is!
    Keep digging Margaret you will soon be in Australia......:)

  • rate this
    +3

    Comment number 248.

    244 Lucy

    "But you are countries, not states+
    you all speak different languages"
    =
    That's no hindrance. For centuries all educated people conversed in Latin and people like Newton wrote their theories in that language. The uneducated seldom left their own towns let alone country. English has replaced Latin, that's all.

    As for being happier or more stable - have you forgotten the wars?

  • rate this
    -2

    Comment number 247.

    shgp: an industrialised country which isn't debt ridden?

    Austrailia?

    Marg: So what happens if the US as a whole goes bankrupt?

    We are in different situation than Greece, Italy, Spain, etc- much larger+more globally connected- we're a 'Megacountry'

    No one is going to bail us out+ we will surely but slowly repay our debt

  • rate this
    -3

    Comment number 246.

    242.margaret howard
    The system only served greedy bankers. If it goes it will be a retrograde step.

    Pray enlighten me, who is benefiting from the billion euro bail outs The people or the BANKERS

    Margaret you are totally out of your depth and frankly it is embarrassing.!

    Have you some knitting you could see too?

    Have you ever traveled out of Scotland.... truthfully?

  • rate this
    +4

    Comment number 245.

    240 Lucy

    "In USA our states cannot go bankrupt"
    ===
    So what happens if the US as a whole goes bankrupt as is most likely to happen with your enormous debts? Who is going to bail out your bankrupt states?

    If the cupboard is bare then it won't matter if you are a united states or an amalgamation of separate countries.

  • rate this
    -3

    Comment number 244.

    Marg:Imagine travelling from one US state to another

    I just got back from California ;)

    But you are countries, not states+
    you all speak different languages

    Marg:returning with useless foreign coins

    Great souvenirs
    Put them in your scrapbook w/ your pics
    Or you never know when you will go back

    Marg:That's what we did before the euro

    You guys seemed happier+more stabile then

  • rate this
    0

    Comment number 243.

    240.LucyJ; Tell me an industrialised country which isn't debt ridden? The USA is technically bankrupt along with Japan and Europe!
    I am astonished that Margaret supports the euro based on the premise of 'holiday' money, I am aware of her limitations but even so.... Austerity across Europe is essential to assist holiday makers traveling through different lands. Imbecilic and uninformed idiocy.

  • rate this
    +1

    Comment number 242.

    231 Lucy

    "What was the real reason the Euro currency was created in the first place?
    ===
    Imagine travelling from one US state to another and having to change money every time and paying a percentage for the privilege. And returning with useless foreign coins.

    That's what we did before the euro. The system only served greedy bankers. If it goes it will be a retrograde step.

  • rate this
    -1

    Comment number 241.

    237.quietoaktree; I presume from your imbecilic comment that you blame the populous of the USSR for that failure too? Ha
    You do drop into some deep holes with your inane statements!

  • rate this
    -2

    Comment number 240.

    To me the best thing that could happen to Europe is if your debt-ridden countries went bankrupt+the other countries forgave their debt

    It would be akin to starting anew w/out all the harsh austerity measures

    Some countries would lose much money
    but they wouldn't have to pay the even bigger amount for the bailout

    In USA our states cannot go bankrupt
    B/c you are still countries you can

  • rate this
    -1

    Comment number 239.

    237.quietoaktree; Please clarify the lie's or apologise!

  • rate this
    0

    Comment number 238.

    #234 QOT

    German workers got a bad deal with Hartz IV, while the industrial chiefs went on to build their commercial empires. Some of these are mentioned in corruption scandals in Greece, others are on lists in tax havens such as Lichtenstein.

    Several people oppose the virtuous German to the 'bad' Greek, but there is social injustice in Germany, which is exported to the PIIGS as 'austerity'.

  • rate this
    -1

    Comment number 237.

    #236 shpg

    --stop telling Lucy untruths.

    -- Europe (incl. UK) and its citizens have failed --nothing else !

  • rate this
    -1

    Comment number 236.

    233.LucyJ;You begged it? In 16 of the 17 euro lands it was imposed,hardly begging!
    You must understand in Europe we have a political class, the majority of whom have never held a 'real' job, they see the gravy train and hitch a ride.
    I believe if the likes of Merkel try to impose fiscal union in order to 'protect' the failed single currency it will result in bloodshed. The EU & euro have failed

 

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