Europe: Back from the brink

German Chancellor Angela Merkel (C) talks with European Central Bank President Mario Draghi and Italian Prime Minister Mario Monti (R)

The summer of crisis, collapse and political disorientation is cancelled.

Last night the EU leaders took steps which, though not a complete solution to the crisis, averted its escalation. Crucially Angela Merkel did what she had insisted was impossible. She made major concessions on short-term measures to ease the crisis without achieving the long-term quid-pro-quo, German politics had dictated she must demand.

The EU leaders made a series of moves, each separately important, which have averted catastrophe - allowing Europe's troubles to become "just a crisis" again.

First, the Spanish bank bailout has been changed. Money will be injected directly into banks with no corresponding increase in Spain's national debt. To be clear - the liability is being assumed jointly by countries still healthy enough to inject money into the European Stability Mechanism (ESM) fund. The Irish bailout will be re-done in this way (though there is more detail to follow there).

Second - and an important precedent - the Spanish bank bailout money will not create "senior" claims by the bailout fund. Up to now, the countries lending the money had planned to award themselves "seniority" over private sector investors, which could have provoked massive capital flight from the bailed-out economies.

Third, they removed the "Troika-discipline" from future bailouts. If Italy and Spain are complying with the rules of the fiscal compact agreed last December, they can get bailout money from the 500bn euro fund without having to impose tough new austerity conditions.

Fourth, they agreed a (fairly meager, but morally significant) fiscal stimulus, borrowing money against structural funds to boost 130bn euros (£105bn) into the economies facing collapse.

Finally they agreed to move to a single banking supervisor by 1 January 2013; not the "full banking union" desired by some, but a clear and irrevocable step towards it. The single regulator is the only condition secured by Germany for the release of all the other monies and permissions.

'Vicious circle'

What's missing is the commitment, demanded by Italy, for the European Financial Stability Facility (EFSF) and ESM to intervene in the bond markets - buying the bonds of stricken countries - in a kind of bailout-via-the-market. But it is still permitted and if done, it will be led by the European Central Bank, allowing the ECB to use the 500bn euro fund in a way that fudges fiscal and monetary intervention.

The memorandum begins: "We affirm that it is imperative to break the vicious circle between banks and sovereigns." And to this extent it does what it says on the tin.

Europe stood on the brink of a Spanish and Italian debt crisis that would have a) required massive austerity in both countries and b) probably been the signal for massive capital flight from Europe. There was real fear that one or more countries would exit the euro; that Spain and Italy would be forced to default; that the subsequent revaluation of assets would sink several core-country banks; that the technocrats, having failed, would be replaced in short order by ideological politicians, not least a back-from-zombification Silvio Berlusconi.

This is all averted - provided the Germans buy what Merkel signed up to.

However, having broken the link between bank and sovereign debt crises, these crises still exist.

Spain is - as Joe Stiglitz said on BBC Newsnight last night - in a depression. Italy is stagnating. There is still an inter-bank credit crunch across Europe and all three sectors - consumer, banks and governments - are still overwhelmed by bad debt.

As the hours ticked towards conclusion, I received the latest of several briefings from people who were "talking to the Germans", that is, to senior CDU politicians, bankers, businesspeople and so on. The message was "we're prepared to inflict pain on Europe now - including a recession on ourselves - to secure tough fiscal rules for the next generation. We can sit it out."

That is probably how Mrs Merkel went into the meeting thinking. But the rapid shift in the balance of forces in Europe defeated her and she could no longer use Sarkozy as a human shield.

Instead she has come out of the bruising overnight encounter committed to bailing out southern Europe with German taxpayers' funds, with no seniority for the debt and no special conditions of austerity such as were imposed on Greece, Portugal and Ireland.

Focus on growth

So though it is not the end of the crisis, it is the end of an era - which started with the first Greek bailout and ended in Brussels last night - in which Franco-German policy was to impose internal devaluation measures on the south that caused one Daily Telegraph economist to describe them as "basically fascist".

Growth is the solution to indebtedness, is the subtext of last night. Growth plus regular, long-term fiscal balancing measures and tough supervision of the banks. This, in its own way, brings Europe into line with America, where President Obama has completed the image of this as a corner-turning week by facing down the challenge to his healthcare law.

That leaves only one major economy committed to austerity first and growth maybe. It is an economy that could do with a bit of effective banking supervision itself. If the bond markets become convinced Europe is stabilised, they may now look quizzically at this last major economy, mired in a double-dip recession and with - on the admission of its industry minister - no real growth strategy. Meanwhile that country's people see the 17-member eurozone racing towards a banking union and locked-in fiscal policies.

To put it another way: the battle of Europe is over (for now). The battle of Britain may be about to begin.

Paul Mason, Economics editor, Newsnight Article written by Paul Mason Paul Mason Former economics editor, Newsnight

End of an era

After 12 years on Newsnight, Economics editor Paul Mason has moved on to pastures new and this blog is now closed.

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  • rate this

    Comment number 36.

    bob very true but do know real reason they happen in September.
    the answer is a certain group is on holiday.
    if you look at 2008 crisis the market went back up when that group came back from holiday.

  • rate this

    Comment number 35.

    #15 Wiz

    September is a favourite month for a banking crisis.

    Of the 147 banking crises since 1970, 27 have started in September.

    (147 banking crises, 218 currency crises and 66 sovereign crises over this period)


    well worth a read if only for the scary graphs and tables.

  • rate this

    Comment number 34.

    Simple question but I haven't heard a good answer:

    Why do all these banks need bailout?

    Also, even if they do for whatever reason: Why is it our job (as citizens) to bail them out?

    I've never heard of a bank bailing out citizens just because they need it...

  • rate this

    Comment number 33.

    Well, I had an inkling when I left Europe 44 years ago. If I stayed I would have to work till 67 and help pay off southern Europe's debts.

    I have retired at 60 because I paid enough into a private pension fund in my country of choice so that I can live comfortably in retirement.

    I remember the EEC, that worked. After my departure I heard all about those "friends"that wanted to join. All losers.

  • rate this

    Comment number 32.


    "......the balance is redressed to the left..."

    I remember the soviet union went bust. Unlike the BS spread around it was mainly die to the economic condition. the economy could no longer support the spending on the military, the war in Afghanistan, the space adventures and even the people got restive once Gorby eased the chains a bit.

    More borrowing isn't going to be the solution

  • rate this

    Comment number 31.

    Just read the German paper Der Spiegel, in particular the readers comments.

    Well, the German football fans are pretty pissed off and those commenting on Merkel's Euro conference showing are even more pissed off.

    Judging from the tone off the comments she will get no backing from the the people. many hope that the Constitutional Court is going to block the government's and parliament's decision .

  • rate this

    Comment number 30.

    Remember "We're all in it together, Dave" ?. Well here is the rub.

    Merkel needs to show her electorate that they are not working hard and then bailing out spendthrifts.
    Equally she has to show them that the recipients of this largesse are not living the life of Riley.

    So Dave, posh boy, needs poor citizens in the UK. As well as keeping his chums happy.


    Polarized society. Deliberately..

  • rate this

    Comment number 29.

    I don't understand the hostility against the Euro. The very successful American model has a common currency with fiscal and economic policy decided at the federal level. It seems to be part of a winning mix of policies.

    Europe, and ultimately Britain, will benefit from a coordinated process of economic activity.

    Alternatively Britain could become a new Switzerland. Independent, and neutral .

  • rate this

    Comment number 28.

    Well, regardless of all that, a camel is still a camel.
    I'm still hanging on to the little bit of cash reserve I've been keeping just in case the banks have a few days of difficulty. I'm not standing in line for my own money to buy food and fuel.
    Pity about the banks though, played straight into the eurocrats' hands.
    All the eu suckups here must be rubbing their hands.

  • rate this

    Comment number 27.

    This can will be kicked down till after the US election. Keep handing out those sticky plasters Angela.

  • rate this

    Comment number 26.

    If the likes of the BBC's Economics editor talk down the UK enough then bond markets will indeed worry about Britain's ability to pay. This will mean more of our taxes go to pay interest on the national debt.

    Why on earth taxpayers should fund lefties at the BBC to talk the EZ up and the UK down is unclear. I thought they were supposed to be impartial, not love the EU and hate Britain.

  • rate this

    Comment number 25.

    #24. Meast123

    "The project has failed, "

    Now which project would that be?"

    Widen your gaze.

    And it's about 300 years too early to tell.

    I agree something has to be done with those wastrels in The City however.

    The funny thing is they know it too. They simply cannot believe their luck.

    That is why they are keeping their heads down.
    They know the score too well.

    Mugs game..

  • rate this

    Comment number 24.

    I think they should all go back to their separate currencies and start afresh! The project has failed, now give up - please.

  • rate this

    Comment number 23.

    The US 'president' bribes freelunchers with their own blood. Merkel is too young to remember, and uninformed to know that the Weimar Republic spawned wheelbarrows full of 'wages' whose worth was less than Chamberlain's sheet of Hitler's toilet paper.

    You may edit as you wish, it is true.

  • rate this

    Comment number 22.

    The deck has been shuffled and the marked cards replaced but it still remains a game of chance. There are still massive risks involved and the debt to be paid in the future is now even larger.

    How are they going to get this growth from which recovery will come?

    With regard to the UK the Coalition has been far too complacent as Vince suggests..

  • rate this

    Comment number 21.

    Yet another Communist piece from the BBC. pathetic. The problem with Socialism is eventually you run out of other people's money. His type were teh 364 economists who wrote against keeping houses in financial order in the early 80s. yet they were proven 100% wrong by the growth of the 80s and 90s.
    Paul must be up to his eyeballs in buy to let, is all I can imagine.

  • Comment number 20.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 19.

    Or, in words other than Pro-EU BBC-speak, Europe's omni-shambles continues unabated.

  • rate this

    Comment number 18.

    Some may look upon this as bringing relief. Back from the brink.

    Others however. Mainly denizens of The City, see this as simply a way to carry on making a living

    It's what they do. Some toil in the fields or on boats at sea

    These guys sit in front of screens and shuffle 1s and 0s around whilst pretending to not be playing in a distributed role game.

    Regularly needing more dosh thrown to them.

  • rate this

    Comment number 17.

    What absolute rubbish. Nothing has been resolved. The can of overspending, borrowing and debt has just been kicked further down the road for a few more weeks, maybe even days. Furthermore if this latest debacle had been presided over by Cameron you would have been screaming 'U-turn'.


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