BBC BLOGS - Gavin Hewitt's Europe

Archives for November 2010

Playing the long game

Gavin Hewitt | 11:36 UK time, Monday, 29 November 2010


So the Irish bail-out has been signed off. Ireland has its massive loans.

European ministers have headed for the microphones today to proclaim the euro has been saved.

German finance minister Wolfgang Schaeuble described the deal as "a big success for Europe".

A woman walks past a branch of the Bank of Ireland in Central Dublin (28 Nov 2010)

Likewise French government spokesman Francois Baroin said the rescue plan "forms part of the absolute determination in Europe - of France and Germany - to save the euro-zone".

Certainly it has bought some time.

Ireland like Greece before it has been given a respite from the unforgiving glare of investors and the bond markets. With the announcement of a permanent mechanism to handle future crises some uncertainty has been removed. Investors could share in losses after 2013 but only if a country is declared insolvent.

The prospect of a more immediate hair-cut has been dispelled.

But here's the question: does this latest bail-out actually address the underlying problems?Take Greece which has been in the lifeboat longer.

At the time of the bail-out its total debts were in the region of 300bn euros. Since then it has drawn on several tranches from the 110bn euro bail-out fund. These are intended as loans so they add to the total debts.

In the meantime the Greek economy is contracting. In the third quarter, GDP actually shrank by 4.7%. And public spending is being reduced further.

Cuts of 9bn euros had been announced earlier. Then it was discovered that the budget deficit was higher than first thought. So the government said it would reduce spending by a further 4bn euros.

While Athens is having some success in reducing its deficit it is struggling to increase tax revenues.

In May, when Greece was bailed out, the rescue package was for three years until 2013.

At the time some asked 'what would happen then?'

The markets did the sums. The conclusion was that Greece might just succeed in reducing its deficit but its debt mountain most probably would have risen.

So Greece would have been given 'time-out' by the bail-out but when it returned to the field of play it would be back where it started.

Scroll forward to yesterday and the Irish bail-out. Slipped in quietly was the news that maturities of the Greek bail-out loan would be extended.

The Greek government had been pushing for it and almost everyone expected it.

Confronting the reality of the giant black hole of debt has been pushed further into the future.

Which brings us to the Irish Republic - and its 85bn euro bail out. 45bn euros comes from the EU including bilateral loans from Britain; 22bn will come from the IMF. 17.5bn euros will have to come from Ireland itself.

In an unforseen twist, the Irish government will have to use billions of taxpayers' money to save itself.

The billions come from the National Pension Reserve Fund. Some are saying that, until recently, it would have been illegal to raid this pension fund to cover current expenditure.

In Ireland's political debate the use of this fund may turn out to be one of the most controversial elements in the whole bail-out package.
There is an optimistic scenario. Ireland has been given the chance - once and for all - to sort out its banks (they will be fewer and leaner in the future).

It has immediate funds to bolster the reserves of its banks. The government will have no immediate funding problems. It will be spared from having to finance its debts at the very steep rates asked by the markets.

It is committed to 15bn euros in cuts and tax increases over the next four years to bring its deficit down.

The EU yesterday granted it another year - until 2015 - to reached the figure of 3% as demanded by the Growth and Stability Pact.

Its unit labour costs have fallen and its exports are growing by 7%. Manufacturing output is also up. The government predicts growth of 2.7% over the next four years. So Ireland is reborn and over the next 7 years repays its loans and begins paring down its accumulated debt.

But there is another scenario. Ireland has ratcheted up its debts already in absorbing the billions of losses from the banking sector.

They are real losses. Property prices are still falling, so rock-bottom may not have been reached.

More homeowners may default. Ireland is now in the process of drawing on another 67 billion euros in loans with lenders - like British Chancellor George Osborne - pointing out yesterday that he expects to get the money back.

So Ireland's debt mountain will grow. Its economy has already shrunk by 15%.

And here's the dilemma.

Ireland is a country of under five million people. It has taken on a massive loan at a rate of 5.8%. How will it afford to pay it back the interest and pay off the earlier debts?

Growth may return to Ireland sooner than Greece, but while Europe's politicians declare the euro has been protected the reality for countries like Greece and Ireland is years of increasing debt and austerity.

Europe's leaders, who have recently added a tone of desperation in their comments about the euro's future, have taken refuge in the long game while hoping that something turns up that enables countries such as Ireland and Greece to reduce their debts.

Ireland's glimpse of pain

news | 15:22 UK time, Wednesday, 24 November 2010


Irish Prime Minister Brian Cowen addresses reporters in Dublin, 24 November

The Irish government has announced what it calls "a major plan for economic recovery". It is brutal. Some have even labelled it "vicious".

Some of the broad details were trailed well in advance. There will be 15bn euros of savings over the next four years and 6bn of those will come next year. The balance between tax increase and spending cuts will be announced in the budget on 7 December.

Make no mistake, this a hard-knuckle plan. Very few other countries have cut spending by 20%.

Once again, the public sector will feel the axe. Cuts in public sector pay will account for 1.2bn euros. New entrants to the civil service or the public sector will get a 10% pay cut. Jobs will be lost - more than 24,000 of them. There will be cuts in public sector pensions.

The minimum wage will be reduced to 7.65 euros an hour.

Over the next four years, 2.8bn will be cut from the social welfare bill. There will be cuts in services. Students will have to make a new contribution to their studies.

Taxes will go up but not corporation tax which the plan says remains a "cornerstone of industrial policy". VAT will drift steadily up to 23% in 2014. The numbers paying the upper rate of income tax will go up. There will an increase in pension-related taxes.

The purpose of all this is to pare Ireland's deficit from 32% now (taking into account this year's one-off support for the banking sector) down to 3% in 2014.

A woman protests against the cuts in Dublin, 24 November

Many questions flow from this "blueprint for sustainable economic growth".

The government expects economic growth of 2.75% for the years 2011 to 2014. That is far from certain considering the spending cuts they are making.

To date, the Irish people have swallowed the austerity medicine. They may be more hostile this time around. There could well be demonstrations and opposition on the streets.

Elections are sure to follow and it is not clear which party or government will oversee this programme. The Irish people may use the ballot box to reject this package.

The plan says that economic recovery will be export-led. Although costs will clearly be lower - and that should help exports - many other countries that Ireland trades with are also making cuts.

The Irish will need good fortune this plan to deliver.

The Euro puzzle

Gavin Hewitt | 18:35 UK time, Tuesday, 23 November 2010


Bail-outs focus on the short-term.

They are firefighting. They buy time. They help countries to manage their debts in the here and now.

They can keep at bay the harsh verdicts or judgements of the financial markets.

Municipal workers scuffle with riot police in Athens (23 Nov 2010)

What they don't do is address the basic problems of any particular economy or the fundamental flaws in the single currency.

With the two euro-zone rescues so far the advice is the same.

The bail-out pill should be taken with "structural reforms" and "fiscal consolidation".

What this means, of course, is that the countries should use the loans to become more competitive and reduce their costs so as to usher in a period of prosperity in the future.

In Brussels on Tuesday, a Commission spokesman said that "decisive action should restore robust and sustainable growth". That's the plan.

But can it actually work?

Firstly, reducing the deficits is likely to reduce demand in the short-term.

Greece announced today there would have to be further cuts, probably targeting health spending and loss-making enterprises in the state sector.

These were concessions in order to qualify for a further tranche of money from the EU and the IMF.

Ireland is on the cusp of announcing a four-year plan. We know that savings of 15bn euros are on the cards.

In 2011 there are likely to be tax increases and spending cuts of a further 6 billion euros.

Both those countries have been reducing spending for some time.

Ireland was much praised for applying austerity early. Greece has been cutting wages and benefits in the public sector since May.

Spain announced today progress in reducing its budget deficit but unemployment is stubbornly stuck at 20% and growth hovers just about zero.

So how will these countries grow? Where will demand come from?

And how precisely will they become more competitive? Some of the structural changes - like making labour laws more flexible - will certainly help. But the gap between them and Germany continues to widen.

The main difficulty is that, being in a common currency, they have a fixed exchange rate and they cannot resort to devaluation which would make it easier to sell their goods and services abroad.

So there really is little alternative than to hold down wages for years to come. A generation - in these bail-out countries - will see a cut in living standards.

And that prompts another question - will the voters accept this as the price for defending a common currency

It is the long term nature of this crisis that is just beginning to gain recognition. Charles Grant from the Centre of European Reform said "it will be a bloody mess for five years at least".

And if growth proves elusive how will Greece and Ireland pay back the loans?

Already Greece has asked and been assured that more help will be available when the rescue expires in 2013.

The short-term can be fixed. No problem. It is the future that looks so uncertain.

The Irish fall-out

Gavin Hewitt | 15:17 UK time, Monday, 22 November 2010


Suddenly everything is in play. Or so it seems. What only recently was discussed at the margins is now in the full glare.

Irish sovereignty. What have the Irish - so proud of their independence - given away? Will this rescue stem uncertainty and give the eurozone time to recover? What lies beyond a bail-out if it doesn't work? How many bail-outs can Europe sustain before it is overwhelmed? Should the UK have demanded some concession from the EU in return for supporting the bail-out?

Sinn Fein protesters outside Dublin parliament, 22 Nov 10

Ireland feels stung, bruised, humiliated. The papers have written of a "nation's outrage". The Irish Finance Minister, Brian Lenihan, has been forced to deny that the forthcoming budget will be "dictated by the IMF and Europe". The 7 December budget, he said, "will be our own budget, nobody else's budget".

Nobody in Ireland is sure any longer. Some people are afraid of "foreign officials" essentially running the economy. Days of speculation lie ahead, for the terms of the bail-out won't be finalised by the end of the month.

What the bail-out has done is to unleash further political uncertainty. The Green Party, in the ruling coalition, wants an early election. The poll could come down to the question: "Who runs Ireland?" The Greens will support the budget, although two independent MPs have indicated they oppose it.

If the hurriedly-arranged bail-out was intended to calm the markets it may not have succeeded. The consensus seems to be that the sovereign debt crisis has a way to run. A comment from Jeremy Batstone-Carr of the stockbrokers Charles Stanley seems to sum up the sentiment. "Now Ireland has fallen," he wrote, "we suspect that the markets will quickly turn their attention to the other embattled peripheral countries, particularly Spain and Portugal".

Portugal is in better shape than Ireland. Its deficit is manageable. It has no property bubble or insolvent banks, but it is finding it difficult to meet its own targets of reducing its deficit and will struggle if the costs of borrowing remain high.

The Spanish said today there was "absolutely no" need for a bail-out and they may yet turn out to be the key country in all this. While the current mechanism could manage a Portuguese bail-out, Spain is an altogether different matter and would test the survivability of the eurozone if down the road it needed rescuing.

Even as the Irish signed up for a rescue fresh doubts were emerging as to whether the Greek bail-out was working. An EU/IMF team is assessing whether Greece qualifies for another tranche of funding. This comes just after Greece announced that public debt was worse than had been revealed. It now seems certain that the country will overshoot its deficit-cutting target.

Now the suspicion in Athens is that pressure is being applied on the government to unveil another round of austerity cuts. Ministers have conceded the talks are "difficult". The expectation is that the public sector will be squeezed further. The government knows that it is already walking a tightrope with the public, many of whom bitterly resent wage cuts and pension reforms.

And here lies the danger for the eurozone. In a monetary union countries in debt have few options. Either they have to go for tough austerity and/or a bail-out.

But what would happen if the people of a country were to refuse to accept further austerity measures? Much of this has yet to play out. I have just been in Portugal. There will be a general strike this week, but the wage cuts and VAT increases kick in in the New Year.

And all the time the gap between what are called the peripheral economies and Germany widens. The only way to correct those imbalances is deflation and that, of course, impacts on growth.

Many of these issues have yet to resolve themselves.

And the Irish crisis has stirred up the Eurosceptics in Britain. They want to know why the British government hasn't used the situation to try to reclaim some powers or to refashion the EU in some way in exchange for helping Ireland. The government, because of investments by UK banks in Ireland, will insist there is national self-interest in help a close neighbour. It has no interest in starting a fight in Brussels, but the Eurosceptics are more vocal than in the early months of the coalition.

And that's what the Irish bail-out has done - put in play some of the big questions.

EU-US summit: Reaffirming the ties that bind

Gavin Hewitt | 22:30 UK time, Saturday, 20 November 2010


This was a tag-on meeting. The European Union's leaders got two hours with the American president before he returned to the United States.

The agenda was less important than the fact of their meeting. Earlier in the year some Europeans felt President Obama had snubbed them by not attending a summit in Madrid.
The White House never saw it that way. The date was never in their diary.

But European feathers had been ruffled. In July the President of the European Commission Jose Manual Barroso had opined that "the transatlantic relationship is not living up to its potential. I think we should do much more together".

So this meeting was intended to show that Europe and the United States were not drifting apart.

President Obama gave an interview to El Pais.There was much talk of the "enduring partnership" of "shared values" and a "common heritage". That mood continued into the moment when President Obama and President Barroso and the president of the European Council shared platforms together at the end of the day.

President Obama said he was "pleased to be here" and then added he was "proud to be here". President Barroso said that he had attended many summits but this one had been "intimate, informal" and marked by a real dialogue. He even threw in some praise for what he called the president's physical resilience, having come on such a long mission to Asia.

There were not any major announcements. President Obama at one point said the summit was "not as exciting as other summits because we basically agree on everything".

The teams discussed sustainable economic growth, climate change and the security of citizens. Together the United States and the EU account for almost half of the world's GDP.

They discussed how to increase trade investment and streamline regulations. They used the language of the recent G20 meeting. They promised to pursue policies that "avoid unsustainable imbalances". The word "sustainable" perhaps understandably was not defined and there was no mention of Germany's current account surplus.

The two sides promised to avoid "competitive devaluations or exchange rate policies that do not reflect underlying economic fundamentals".

There is to be a new working party on cyber security which will report back in a year.

On foreign policy the priority was addressing Iran's nuclear programme. President Obama noted that under Cathy Ashton, the EU 's foreign policy chief, there was a very good chance to engage Iran in direct talks on 5 December.

What was not discussed publicly was that the US and Europe are heading in different directions on the central economic issue of the day. In America the Federal Reserve is pumping in $600 billion into the US economy. Government spending is being expanded to stimulate a sluggish economy.

In Europe it is the age of austerity, with country after country reducing public spending in an attempt to reduce deficits. This is being done even though growth remains anaemic.
The policy is a gamble. It is questionable whether weak economies can pare down their debts while demand is reduced by cuts in the public sector.

On key issues like Afghanistan there was more agreement than anticipated and the American President secured backing from Nato to build a missile shield over Europe.
Many of the details - like how it will be financed - have yet to be agreed, but the decision to proceed was an important decision that only a short while back would have been very difficult to achieve.

But this brief summit was an affirmation of an old partnership where differences were side-stepped and much made of the ties that bind.

Why 'Yes' is so hard for the Irish

news | 12:36 UK time, Thursday, 18 November 2010


Ajai Chopra (L), deputy director of the European Department of the IMF, and an unidentified colleague make their way to the Central Bank of Ireland in Dublin, 18 November

In a radio interview, the Governor of the Bank of Ireland Patrick Honohan confirmed what most people expected - that some kind of bail-out for Ireland seems to be on the way. They may dress it up as a loan for the banks but it will involve tens of billions of euros. Up until the governor's comments, the Irish government was sticking to its line that it did not need rescuing.

And indeed even after the governor had spoken, Irish Finance Minister Brian Lenihan said that his country was not yet at the point of taking a substantial international loan.

Europe's crisis managers, who have been a busy bunch this year, had not envisaged a situation where a country did not want to be bailed out. Quite the opposite. In setting up various rescue mechanisms they feared the profligate, or those who ran up bad debts, would beat a path to their door.

So when last weekend various officials - some close to the European Central Bank - began briefing that it was only a matter of time before Ireland was bailed out, they did not expect such stout resistance from Dublin.

So why did Ireland try and hold out?

The Irish government is fragile. It faces a difficult by-election. Its hold on power is slight. A bail-out, however dressed up, is a humiliation. It is a judgment on the way the government has run the country.

There is a stigma to being rescued. The image of the Celtic Tiger has long disappeared but the Irish still cherish the memory. For some years they had the fastest-growing country in Europe. To be bailed out would wound Irish pride.

Then there are conditions. One of the reasons that Ireland did so well was inward investment - particularly from the US. Large multinational companies were attracted to Ireland by a corporate tax rate of 12.5%. Others in Europe - including the French and Germans - dislike the tax. They believe it gives Ireland an unfair advantage.

Many government officials in Ireland fear that one condition of a rescue would be to give up their low corporate tax rate. A few days ago, Ireland's Europe Minister, Dick Roche, bridled at the very suggestion. "We are in charge of our own taxes," he said. We shall see what the terms of any loan are.

European Commissioner for the Economy Olli Rehn (archive image)

Then there is the not-so-little matter of sovereignty. Already Irish commentators have focused on the EU Economics Commissioner, Ollie Rehn. When they were not reporting on his visit to an expensive restaurant, they asked: "Is he the most important man in Ireland?" Is this unelected official essentially running the country, was the tone of some of the comment.

There are stirrings of unease here at what Ireland may be giving away. When it was announced that a team of experts from the EU, the IMF and the ECB were coming to Dublin, the opposition leader referred to them as "officials arriving to dictate terms of a bail-out to the government".

Ireland for a long period was enthusiastically European. Many smart people headed to Brussels. They embraced the European identity as a way of distancing themselves from their neighbour Britain. They took great satisfaction in seeing Irish companies buying up big hotels in London.

So there is foreboding as to what a bail-out would signify. One Irish commentator wrote today: "Having obtained our political independence from Britain to be the masters of our own affairs, we have now surrendered our sovereignty to the European Commission."

Brian Lenihan has defended the increasing influence of the officials from Brussels with references to European solidarity. "We share our sovereignty with Europe in relation to currency," he said. "We pool our sovereignty in this area, so if you're pooling your sovereignty, you have to act with your partners in whatever steps you take." Yesterday he spoke of a "very supportive reaction from the wider European family".

What the Irish government is hoping for - if the Bank governor is right - is a narrow deal to restore the liquidity of its banks so they can borrow more easily. That would be less of a humiliation.

Sinn Fein's Sean Crowe (L) and Gerry Adams canvas for a

It should not be forgotten that when Irish voters were first given a say on what became the Lisbon Treaty they voted "No". Irish independence is both young and keenly felt.

So if the country is forced to accept a full bail-out, questions will be asked about the future. Will Ireland ever regain control over its budget and its economy?

And that is a question being asked not just on the streets of Dublin but in Athens, Lisbon and Madrid.

Ian Martin, writing in the Wall Street Journal observed: "A new model of government without direct accountability to voters is being constructed."

That, of course, is the long-term implication of this crisis. Presuming that the eurozone does not fracture, its flaws are being used to give the European Commission much greater powers of scrutiny and economic management. And this may go further. While everyone focuses on Ireland, Greece and Portugal, the gap between these economies and Germany only widens. The price of saving the euro may be that the stronger countries bail out the weaker - precisely what German voters were told would never happen.

The "ever closer union" that some dream of may be delivered on the back of a battered currency.

Fear and the euro

Gavin Hewitt | 16:22 UK time, Tuesday, 16 November 2010


Panic is not the right word, but fear lingers in Brussels's corridors and in some capitals.

The fear is that the crisis in the eurozone - far from ebbing as many times predicted - remains acute.

You can sense the alarm today's comments by European Council President Herman Van Rompuy. He called it a "survival crisis". He urged: "We must all work together in order to survive with the eurozone, because if we do not survive with the eurozone, we will not survive with the EU." It is, of course, a debatable point. The EU survived before the advent of the single currency.

Shop window in Dublin advertising liquidation prices, 11 Nov 10

But this was a threat: that the Irish debt crisis could bring down the whole EU. This stark message was intended to scare states and leaders into coming up with answers.

In Germany, Angela Merkel too has been playing on fears. The German chancellor said: "I'm telling you, everything is at stake. If the euro fails, then Europe will fail. And with it fails the idea of European values and unity."

It is hard to know whether Mrs Merkel believes this to be literally true. But her intention was also clear: to rattle those within her own party and elsewhere in Germany who are in increasing numbers beginning to question the point of the European Union.

What has turned public opinion in Germany is the bail-out of Greece and the setting up of a so-called stability mechanism. It is sometimes forgotten - but not in Germany - that when the Deutschmark was given up there was a commitment that other countries would not be bailed out. Many Germans do not want to become the paymasters of Europe, but Mrs Merkel was trying to give herself some room for compromise. More German money may still be needed to resolve the euro crisis.

In this atmosphere of frayed nerves Europe speaks with many voices. The Economy Commissioner, Olli Rehn, warned today of "existential alarmism". He believes that such comments do not help. He expressly contradicted President Van Rompuy when he said the current crisis "is not a matter of survival of the euro".

And then in the wings the Greek leader, George Papandreou, accused the Germans of forcing countries towards bankruptcy. He said German tough talk that private bondholders could suffer losses in any future bail-out had pushed up borrowing costs and could "break backs".

The focus of the current crisis remains Ireland. Having spent the last 36 hours in Dublin I can report a sense of deep resentment at the pressure being put on the Irish government. Ministers genuinely believe they have a strategy that can work. They want time to deliver their budget on 7 December. That will set out the spending cuts and the tax increases to deliver a further 15bn euros (£13bn) of savings over the next few years. They also say that growth next year could be 2.5%.

Now in these fractious times all kinds of people are insisting they are not putting pressure on the Irish. The European Commission, for one, says its hand are clean.

Fingers point at the European Central Bank (ECB). They deny it too. Only the Portuguese and the Spanish are openly leaning on Dublin. The Portuguese say they are suffering from higher borrowing costs because of doubts over Irish debt. They say they might be pushed into asking for a bail-out. The Spanish Treasury Secretary, Carlos Ocana, pressed Ireland to come to a resolution quickly to end market uncertainty.

What is happening is that Ireland is being told to accept some kind of rescue for the good of the euro.

The problem for the Irish government is that it not only believes a bail-out is unnecessary - it fears humiliation, the stigma of having once been the Celtic Tiger but now needing to be rescued.

"There's no reason why we should trigger an IMF or an EU-type bail-out," said the Irish Europe Minister, Dick Roche. The pain would be less if the bail-out was just for Ireland's banks, which lie at the heart of its difficulties. The banks are having difficulty finding operating cash.

David McWilliams, an economist and the author of The Pope's Children (his account of Ireland's years of excess), said Ireland's only card was to admit defeat and essentially say that Ireland's problems were Europe's. That is one option, but it would amount to Ireland surrendering financial independence.

Something will give. The European Commission is holding talks with the IMF and the ECB. There are those who say that failure to reach agreement during the current meeting of European finance ministers could agitate the market and push up borrowing costs further.

The biggest concern is the domino effects - that Portugal won't be able to raise sufficient funds because of the cost of borrowing. If Portugal had to be bailed out the markets might question whether Spain could service its own debt, considering it has almost zero growth. The EU's bail-out mechanism may be able to handle the debts of Greece, Ireland and Portugal, but Spain would be altogether a different matter.

Ireland fights to avoid bail-out

Gavin Hewitt | 08:40 UK time, Monday, 15 November 2010


DUBLIN The Irish economy is in desperate straits. No one disputes that. Its bank debt is the highest in the world. It amounts to something like £12,000 (14,000 euros) for every man, woman and child in the Republic of Ireland.

Last week the financial markets declared loudly that they regarded Ireland as a risky bet and forced up the cost of borrowing.

EU officials looked on with increasing anxiety. What they feared was a replay of the Greek crisis earlier in the year, when indecision threatened the entire eurozone. Once again the fear was of contagion - that Ireland's problems were forcing up borrowing costs elsewhere, particularly in Portugal.

There is a belief in Irish circles that some Brussels officials are trying to put the squeeze on Ireland to accept around £50bn in rescue aid.

But Ireland is resisting. Over the weekend Irish minister after minister insisted they had not asked for a bail-out and did not want one. One minister handed me a printed piece of paper which had at the bottom in bold type: "we can work through this ourselves".

The Irish position is that they don't need extra funding until the middle of next year. There will be a budget on 7 December, where further savings of £5bn will be made. The Irish government says that by December next year they will be two-thirds of the way to getting their budget down to 3% by 2014. That is the plan and they believe it is credible and workable.

The financial markets have doubts. They cannot see the growth or the tax receipts that will pare down Ireland's debt mountain. Many economists believe that sooner or later Ireland will have to appeal for help.

There is a political dimension to this of course. A bail-out would be a humiliation for a country that just a short while ago was the Celtic Tiger. Some see these days as critical for Irish fiscal independence. One politician said: "it's been a very hard-won sovereignty for this country and this government is not going to give over that sovereignty to anyone." The official line is that Ireland must show it can stand alone.

Discounted clothing with 'Ireland' logo in Dublin - file pic

Yesterday in Brussels there was a high-level meeting involving Commission President Barroso and the Economics Commissioner, Olli Rehn. Gathering on a Sunday afternoon in the Berlaymont building this was in all but name an emergency meeting. On the agenda was one key question: was action needed before markets opened today.

So everyone will be watching the financial markets. Ireland will continue insisting it has a credible plan. Tomorrow in Brussels there is a European finance ministers' meeting and that could prove a crucial moment for Ireland.

On Friday there was some relief in the bond markets after a clarification from Germany that its wish to see private investors rather than taxpayers carry the burden of any bail-out would not apply until after 2013. Some investors had been dumping Irish bonds fearing they could suffer losses.

There is a wider dimension to this crisis. An announcement is expected today revealing that Greece's deficit figure is higher than declared and that it won't reach its declared target for deficit reduction this year. Greece has robustly embraced austerity measures but its tax receipts are down. It raises questions as to whether the medicine is working. Since May last year observers have been asking two questions: how will countries like Greece reduce their debts, when growth is being slowed by cuts and what position will Greece be in when its bail-out funds expire in 2013? The answers are not yet in. But the Greek government is already starting to lobby for the bail-out period to be extended.

Here is the wider difficulty for the eurozone periphery countries. They cannot devalue their currency or cut interest rates. They have few other tools in the box than to cut spending and slash wages. Yesterday in Ireland I met a civil servant who is already getting 70 euros (£60) less a week - a 13% cut. How much more austerity will voters take?

Although they are not in the majority there are voices in Ireland questioning why Ireland simply shouldn't restructure its debt, regardless of the consequences for its EU partners. Others are asking: is the potential bail-out about saving Ireland or the euro?

Another sense of the wider crisis came yesterday from Portugal, when its foreign minister said that a failure to adopt a coalition government in Lisbon to tackle its debt crisis could force the country out of the euro.

So the immediate focus is on Ireland, but the longer-term question is whether the medicine being administered - spending cuts and structural reforms - can rescue the eurozone.

UPDATE Official EU figures released today show that Greece has a significantly higher budget deficit and debt than previously revealed. Greece's deficit last year stood at 15.4% of GDP - higher than the figure of 13.6% given in April. Greece's overall debt figure for 2009 was revised up to 126.8% of GDP, from 115.1% previously.

Battle-lines drawn over EU's future

news | 09:39 UK time, Friday, 12 November 2010


This is a day to view some of the battle-lines being drawn in Europe. Firstly, the British government has published its European Union Bill. Its purpose is to draw a clear line preventing the "slippery slope", where more powers move inexorably to Brussels.

British Prime Minister David Cameron (left) speaks to European Commission President Jose Manuel Barroso in Brussels, 28 October 10

For many in the Conservative Party, this all comes too late. They argue that very substantive powers were handed to the EU under the Lisbon Treaty. That battle, however, is lost to them. A minister said to me: "We are accepting the Lisbon Treaty as a done deal." The past has been accepted. There is no wish, said the minister, to reopen treaty changes.

So to the future. There will now be a "referendum lock": any new EU treaties or major changes to existing treaties will have to be approved or rejected by the British people in a referendum.

Examples would be a decision to give up the UK's border controls or to join the euro.

But ministers will have to decide whether treaty amendments are "significant" before recommending a referendum. New directives or obligations would not necessarily trigger a poll. So some new powers could go to the EU without the British people being consulted.

The judgement as to what is "significant" could prove controversial and could lead to legal challenges.

As expected, there is a "sovereignty clause" confirming that EU laws will only take effect in the UK with the agreement of the UK Parliament. The clause is intended to underline Parliament's sovereignty.

The bill also seeks to limit so-called "ratchet clauses" or "passerelles" where some competences can be automatically extended. These would now require primary legislation.

The bill is intended to deliver on a Conservative election promise that never again will power be transferred to Brussels without the British people having a say.

It will not satisfy a significant number of Conservative back-benchers. Nor will it satisfy others.

But some like Liberal Democrat MEP Andrew Duff say: "We will be keen to reassure ourselves that this Bill does not substantively change the terms of the UK's membership of the EU...

"The move to referenda seems to be calculated to appeal to a populist and nationalist constituency which undoubtedly exists in the UK."

We may soon learn what is to be the final budget increase for 2011. The expectation is that the European Parliament, under pressure, will settle for 2.91%, the figure David Cameron persuaded some European leaders to insist was their top figure. MEPs, who wanted a 5.9% increase, have insisted that extra money is needed to fund the new institutions brought in by the Lisbon Treaty.

Even if there is agreement on a 2.91% increase, the MEPs have put down a marker that in future they want a stronger say over spending including direct EU taxes. Several countries including the UK and Germany oppose such taxes but the budget is shaping up to be another battle-line.

Then there is the euro. Ireland is teetering on the edge of a bail-out. Portugal may not be far behind.

"Ireland is close to losing credibility among investors," said one analyst. "There will have to be a bail-out in the end," said Ashok Shah of London and Capital.

Ireland does not need funds from the markets until June next year but the cost of borrowing is shooting up and there has been a dramatic sell-off of Irish bonds. The sentiment is moving against Ireland surviving without a rescue. Two-thirds of economists and bond strategists polled by Reuters foresaw a bail-out by the end of next year.

A man walks past empty shops in Dublin, 11 November

Ireland is about to announce its fiscal plan for the next four years. It will need a further 15bn euros in savings. No one doubts the Irish government's determination to find those savings both by raising taxes and cutting spending. The details will be announced in the budget on 7 December. But - and here's the rub - the financial markets fear the austerity measures will only make matters worse by choking demand. Ireland, they believe, is locked in a deadly downward spiral.

Being locked into the euro, Ireland does not have the freedom to lower its exchange rate and so boost its exports. There are only two alternatives left: fierce austerity and/or a bail-out.

Here again there are battle-lines. Several European leaders have recently said that the whole European project depends on the euro surviving in its present form. They are statements rooted in a deep anxiety but no one should doubt the determination of Europe's high officials to fight to save the single currency. The question is this: Is it better to defend countries staying in the euro at all cost or might it make sense for some countries to leave the single currency for a period, sort out their economies and then rejoin the euro some time in the future?

Much of the European year has been devoted to firefighting to save the euro. The final weeks of 2010 look as if there will be more of the same. It is another fault-line.

It did not help sentiment that the Greek government announced that it was unlikely to meet the budget deficit agreed with the EU and the IMF. The deficit will likely be 9% rather than 8.1%.

European Council President Herman Van Rompuy delivers his State of Europe address in the Pergamon Museum, Berlin, Germany, 9 November

And then lurking in the background is the big clash of visions. Herman Van Rompuy, the president of the Council, declared in Berlin that "euroscepticism leads to war". He went on to say that "a rising tide of nationalism is the EU's biggest enemy".

He added the thought that "the time of the homogeneous nation state is over". Those comments have enraged some but President Van Rompuy speaks with a candour not always shared by other senior officials. You know where you stand with him. He challenges the idea of the nation state surviving in the globalised world.

Of course there are others who say that the EU is profoundly undemocratic, bureaucratic and wasteful of money. They would argue that increasingly - when given the chance - Europe's voters show they see their identity tied to the nation state.

But all around there are big defining arguments over the future shape of Europe.

Germans argue over 'failure to integrate'

news | 16:59 UK time, Sunday, 7 November 2010


Thilo Sarrazin is not charismatic, but he has become a man of influence. He has changed the debate over immigration in Germany.

In his view "suppressing emotion is even more dangerous" than broaching subjects that were recently largely off-limits.

Others, like analyst Prof Klaus Kocks, have issued a note of caution. "As a German," he told me, "you have to be more careful than others. You have to accept our history."

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I met Thilo Sarrazin at his old school in Recklinghausen. He was there to promote his book, Germany Abolishes Itself. He is both reviled and admired for its controversial thesis.

Outside the school were a handful of protesters. One banner accused Mr Sarrazin of acting like the Nazis. There were many more, however, who had bought tickets to hear him. His book has sold close to a million copies.

His essential message is that Muslims are either "unwilling or unable to integrate" into Western society. "If the majority of migrants from non-Muslim countries don't have any obvious problem integrating," he told a packed hall, "then the failure to integrate on the part of migrants from Muslim countries can't be due to a fault on our side - because all are treated equally. It has to be because of a characteristic of Muslims themselves."

He is not a great speaker. He deals in statistics. He recognises that some Muslims have integrated, but he believes Germany has gone too far in trying to accommodate them. "People who obey laws are welcome to live here," he told me, but he wants to end Muslim immigration.

For those already in Germany, welfare payments would be dependent on learning German and acquiring language skills. Parents who do not send their children to school (for religious reasons) should be fined. Forced marriages should be forbidden. His message is that Muslim migrants must accept German laws, the constitution and the values of their new society.

His comments have set off a huge debate. "We have a very serious shift in discussion," Prof Kocks told me. What makes his book sales all the more extraordinary is that Thilo Sarrazin said, as part of the publicity for the book, that Jews had a certain gene. He was condemned by mainstream politicians and the remark led to his resignation from the board of the Bundesbank. Even so, the public made his book a best-seller.

German Chancellor Angela Merkel addresses a meeting of young Christian Democrats in Potsdam, 16 October

Last month, Chancellor Angela Merkel said multiculturalism had "failed utterly". What she meant was that some immigrants and others who had lived in Germany for some years were not integrating. Last week at a regional conference for her party in Essen she said: "Of course integration has changed our society, but not at the expense of our core values... We are Christians and this informs everything we do... We are for diversity but we will not abandon our basic beliefs."

What seems to be changing is what is expected from immigrants. The past idea of multiculturalism was that migrants could live in their new societies much as they had done previously in their home countries. Now the emphasis is on them adapting. The fear is that otherwise there will be separate, parallel communities.

So mainstream politicians are speaking out. Joachim Herrmann is the interior minister in Bavaria. His party, the conservative CSU, is in coalition with that of Angela Merkel. He told us in an interview: "You have to accept our laws... Just because you come from a different culture where a man can treat his wife differently, you can't do that here. There can be no compromise."

The premier in Bavaria, Horst Seehofer, has called for an end to immigration from "Turkey and other Arab countries".

Muslims are fearful of where this new tone is heading. Nurhan Solkan is general secretary of the Council of Muslims. She says that the views of the far right have now entered the political mainstream. She points out that many immigrants have integrated well. Many will tell you how when they first came to Germany, no one wanted them to integrate. They were guest-workers. They were barred from citizenship. Nurhan Solkan said more and more people of Turkish origin were moving back to Turkey.

Dr Kocks told me: "I don't want to go back to nationalism again." He does not think that is happening. There is no growth in far-right parties. But he says there is a deep anger in society over stories, for instance, that some female teachers have been shown disrespect by Muslim boys.

Prof Jurgen Habermas, writing in the New York Times last week, said Germany was being roiled by "waves of political turmoil over integration, multiculturalism and the role of the 'Leitkultur', or guiding national culture." He said it was reinforcing trends towards xenophobia. He sees clear dangers in getting immigrants to assimilate "the values of the majority culture and to adopt its customs".

But that is the new mood and, judging by the success of Thilo Sarrazin's book, it seems that many Germans want minorities to positively embrace being German.

Where is Europe's Tea Party?

Gavin Hewitt | 17:38 UK time, Wednesday, 3 November 2010


In the United States it was a time for anger; 23% of those polled as they left the polling booths said they were angry.

It was a time to rage against government. Dislike of Washington is never far beneath the surface in the United States. The stubbornly persistent unemployment lines came on the back of an economy that failed for almost ten years to provide real wage increases for middle-class Americans.

Tea Party Republican supporter, Texas, 2 Nov 10

And some of the anger was directed at the president. During his election campaign his life story connected to the American people. He was the embodiment of the American dream.

In office he has failed to find the language, the narrative that linked him to ordinary Americans. The almost zen-like no drama-Obama has seemed too distant, too cerebral, too calm.

So many Americans have taken refuge in a movement. For the Tea Party the future lies in the past. America, it insists, is on the wrong track. It has to return to old values. Self-reliance, small government and low taxes. One nation under God.

The attraction of the Tea Party is not its policies. It appeals to an almost visceral sense of what America was and how its greatness was achieved. Incoherent it often is, but it can drive incumbents from office and has changed the political landscape.

In Europe, too, there is reason to rage. Apart from Germany and a few other countries the recovery has been jobless: 24 million are without work. Unemployment amongst 16 to 24-year-olds is shocking. For that group in Spain the unemployment rate is 43%.

There is talk of a lost generation. Many in their twenties and early thirties believe they will never have the prosperity of their parents.

Then there is austerity. Almost everywhere the public sector is being hacked back. Pay has been cut or frozen. Public sector jobs are disappearing. Half a million posts may go in just Britain alone.

Plenty of people believe the debts of the banks have been loaded onto the public sector. In demonstration after demonstration I have met people who believe it to be unfair, unjust. Working people are taking the rap for the banks.

And then - with the recession still threatening - the bankers and CEOs are at the bonus pot once again. There is the greed of public sector managers. There is a European Union that backs austerity for everyone but itself.

All of this could be reason to rage... and yet.

There was anger in France over pension reform. Maybe two million people marched. The oil refineries were blockaded. There were riots in Lyon. A few cars were burnt in Nanterre. But the much-feared student revolt didn't happen. There wasn't the passion for the struggle.

Even in Greece, where the anarchists killed bank workers, street protests have not been able to derail reform.

In Spain, so far, they have accepted changes that made it easier to hire and fire. Yes, there has been a general strike, but again it has not stopped the austerity programme.

In Ireland, where the cuts have been brutal - with more to come - the streets have been strangely silent.

Certainly the electoral cycle may explain part of it. Germany had an election just over a year ago. Britain saw a change of government but there was no landslide.

In France, Italy and Spain elections lie ahead. Only then will we see whether frustration overturns governments.

In France, during the protests, many people complained that their way of life was being threatened by pension reform. Hard-won rights were being sacrificed at the altar of austerity. For some these rights were linked to their identity and what it meant to be French. President Sarkozy will face his voters in 2012.

It is difficult to judge the political mood in Italy because so much debate is tied up with the personal dramas of Silvio Berlusconi.

The mood in Europe, for the moment, seems more resigned than angry. What is happening in country after country is a turning away from the mainstream.

In Holland, Austria, Germany, Sweden, Denmark and Italy populist parties are having success. Their message is that a political elite has betrayed working people. They resent immigration when jobs are so scarce. They fear their known-world is changing. Some of these parties hold the balance of power.

What you do detect is that old moorings are shifting. Fewer people are committed to just one party. They float, ready to change allegiances.

Politicians in Europe have struggled to find the language to explain the economic crisis. They have not so far been able to sketch out where the new jobs will come from and how Europe will compete in the future.

What doesn't exist in Europe is a set of core beliefs that can be embraced again in times of trouble. America's leaders, since the writing of the Constitution, have articulated dreams, beliefs and myths that exercise a powerful hold on the American people. "Morning in America!" "A City set on a hill!" The enduring power of exceptionalism.

Europe has fewer dreams. It may not throw up a Tea Party. But the angst of the time still may have the power to remove leaders from power and shake Europe up.

The Cameron-Sarkozy special relationship

Gavin Hewitt | 16:33 UK time, Tuesday, 2 November 2010


In an ornate state room at Lancaster House, the leaders of France and Britain sat side by side and signed two treaties on defence and security.

On the surface it was like so many treaty signings: the asides between David Cameron and Nicolas Sarkozy about the pens, the handshakes and applause from French and British ministers occupying the front rows.

French President Nicolas Sarkozy and British Prime Minister David Cameron

The compliments, too, were familiar.

David Cameron spoke of President Sarkozy as "my good friend; a great leader and a good friend of this country".

President Sarkozy in turn said to the British leader: "I admire your courage, David, your vision and that of your government."

The claims made for this new era of military co-operation were ambitious.

After all, both countries in the past had attempted to work together. But Nicolas Sarkozy said the planned co-operation was "unequalled in our history".

David Cameron spoke of two world-class armed forces working closer than ever before.

The president said later that the fact that Britain and France had taken such a step was a historic event enabling both to make savings.

David Cameron described it as "a special relationship".

The scale of what is being attempted - from sharing aircraft carriers, to having a joint reaction force, to the testing of nuclear components - is different.

The need to trim defence budgets has brought both nations to this point although the expected savings have yet to be set out.

Both leaders, aware of potential domestic critics, claimed this was not about weakening their countries as powers.

French President Nicolas Sarkozy and British Prime Minister David Cameron after the Anglo-French summit

David Cameron said Britain and France would always remain sovereign nations while Mr Sarkozy said that sovereignty was just as touchy an issue in France as it was in Britain.

As to the question of whether the French president would allow a French carrier to be used in some future conflict, say in the south Atlantic, he was elusive.

Mr Sarkozy said it would take a "hell of a crisis" for Britain to deploy its aircraft carrier. He couldn't imagine it would be done trivially.

He insisted that "our values are the same, our interests are shared".

It did not fully answer the question of what would happen if the two nations disagreed about the use of armed force which has occurred as recently as Iraq.

And what if there was a change of government?

The president said that both he and David Cameron saw beyond the democratic scan of their two governments. He said he relied on common sense. Britain was France's closest neighbour.

This partnership will underline that Britain and France are the two biggest military powers in Europe.

This agreement was not negotiated at European level but between two nation states.

Indeed President Sarkozy had a slight dig at Brussels. In reference to a question, he spoke of European Commission President Barroso or Council President Van Rompuy leading a French/British force.

He said that nobody could have that idea and he added that he was not in favour of "a plethora of bureaucrats".

Mr Sarkozy said he had had a number of frank exchanges with European officials.

On the question of the EU budget he said that when "my dear David" put the question of the budget on the table at the last Council meeting in Brussels we "both leapt at it", referring to himself and Angela Merkel.

He supported either an overall budget cut or a limited increase.

But he did not give any undertakings to support Britain keeping its rebate.

The French president recognised that the Common Agricultural Policy was not popular in Britain: he understood the British red-lines and promised only not to be confrontational.

The chemistry between the two leaders appears good.

A special relationship has been launched on the need to find spending cuts.

This is an entente cordiale that will be tested, as always, by events.

But two military powers also accepted today that alone they no longer have the means to project their power globally. They need to co-operate not at a pan-European level but as two national states with long military traditions.

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