A fateful day for the eurozone
Friday will be remembered as the day the euro needed rescuing. Sure it is Greece that has asked to be bailed out but it was still a day that the architects of the single currency had never envisaged. For when it came to it, there were no plans to save a euro member in trouble.
The last few months have been a long, agonising drama. It is the financial markets that have been in the driving seat. The politicians, the eurozone countries, the European Central Bank, the European Union have all played catch-up, scrambling to put together a rescue plan. Now Europe is faced with what is potentially the biggest ever bail-out of a country.
The rescue pot is around £40bn. Two-thirds of it will come from eurozone countries and one-third from the IMF. For a long period, European countries resisted any involvement from the IMF. Pride stood in the way. They feared that the reputation of the euro would be tarnished. It has been. If they had turned to the IMF earlier, however, the pain might have been less and the crisis shorter.
What the EU hoped was that promises of support would appease the financial markets and that Greece's borrowing costs would decline. It never worked. Investors were not convinced. They doubted Greek statistics. They were uncertain about the details of any proposed rescue package.
Even though Greece cut pay in the public sector, few believed they had cut enough to meet their own target of a 4% reduction in the deficit this year. The domestic pressures on the Greek government were immense. There were almost daily strikes and protests with the occasional riot.
For weeks economists had been saying a bail-out was inevitable. Then in recent days the word leaked out that Greece's finances were worse than had been revealed. Last year's deficit, it turned out, was closer to 13.6 % of GDP than 12.7%. The economy was contracting. Unemployment rising. Greece had entered a spiral.
As it fought to slash its deficit, so its economy began shrinking, making it even more difficult to reduce its debt. There were whispers that Greek banks were facing a funding crisis. Some wealthy Greeks had begun removing their money.
There will now be intense discussions over the conditions of the rescue package. The deal should be in place by early May.
The Greek people will want to know the fine detail of the terms. This week strikers closed hospitals and stopped ferries sailing. If the IMF insists on further cuts - say, to pensions - the streets of the Greek capital could well be volatile. More protests are planned for next week.
So will this be the end of the crisis that has driven the euro sharply lower? Certainly in the short term Greece will be able to finance its debt. It needed to find about 54bn euros this year.
The longer term is harder to read. German bankers fear that the funds needed to save Greece will be much higher than announced. As it lives through its era of austerity Greece's ability to pay back loans may become harder. It may need long-term support. Some believe a similar package will be required in 2011 and perhaps 2012.
We now enter an uncertain period. Will the financial markets test Portugal or Spain? The Spanish economy is five times the size of Greece. Will other bail-outs be needed and would the German taxpayer revolt against helping out others?
This bail-out will be unpopular in Germany. Although there are those who say that the Greek rescue is not technically a bail-out because it comes as a loan, you'll find plenty of economists who say this is just playing with words. For, in effect, Greek borrowing will be subsidised.
So there could be challenges in the German courts to the legality of the Greek bail-out. Chancellor Merkel has made concessions but she wants the bail-out plan to be "convincing". There are regional elections in Germany in early May and the bail-out will be an issue.
In a revealing article in the New York Times, John Kornblum, a former US ambassador to Germany, says that "Europe in the institutional sense has become increasingly unpopular" in Germany.
"German courts have begun to define German European issues in the context of the German constitution rather than on the basis of EU law," he writes. He goes on to say that "the growing gap between Germany's aspirations and the perceived needs of other members of the EU is beginning to burden both sides. Most Europeans are simply not ready to live up to German standards".
Perhaps the most significant legacy of this crisis is the emergence of a Germany that asserts its own national interest above being "good Europeans"; the role it has played in the past.
The biggest challenge, however, is to the EU and the single currency. Some insist that the euro is fundamentally a strong currency. Many disagree, insisting that the single currency has been exposed as flawed. They focus on the difficulty of having monetary and not fiscal union. The differences between, say, the German economy that runs large surpluses and other economies that are crippled with debt are immense. Can all inhabit the same currency zone? The question remains unanswered.
There will be fall-out. Already the EU is discussing stricter enforcement measures; those countries that break the rules and run up huge deficits could well face severe sanctions in the future.
How to address the difference in competitiveness between countries in the eurozone is a much harder question. To persuade Germans to spend more or save less is a non-starter. Germany has sacrificed much to achieve its status as a major exporter and manufacturer.
There will be pressure to set up a mechanism to deal with similar crises in the future. That might necessitate treaty changes and that would open up another round of painful negotiations just after the Lisbon Treaty has been ratified. There are no easy options but the fundamental weaknesses in the euro will have to be addressed one way or another.