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 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 1.

    Absolutely on the mark. Yesterday was a great day. At last, we can start to look forward again. Whew, what a grind it has been, but now we can begin to breath easier in the eurozone. The difference has been the shift away from Sarkozy, and the alignment along the Mediterranean. Enough pain has been seen in Greece, enough emigration in Ireland. The balance is now being redressed to the left.

  • 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 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..

  • Comment number 20.

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


Comments 5 of 56



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