BBC BLOGS - Gavin Hewitt's Europe

Archives for December 2010

A bleak year in Europe

Gavin Hewitt | 10:16 UK time, Monday, 20 December 2010


Images define a year. A captured moment. A snapshot. Some we share together - like Charles and Camilla caught open-mouthed as the mob circles. Other images are our own. Three, in particular, stay with me.

Anti-government protest in Dublin, 7 Dec 10

It is early morning in Madrid. A pre-school hour. The street is narrow and dark, where the sun rarely reaches. There is already a line of people - perhaps 250 - hunched together against the morning chill. They are waiting to collect their unemployment benefit. What catches my eye is how many of them are reading. These are mainly young, intelligent people. A young woman turns her back to the camera. She is a part-time actress and doesn't want to be seen on the line. Beyond her the queue snakes around the corner and in that moment I glimpse a lost generation.

On another day I am in Dublin, at a technical college on the outskirts of the city. I am in a room with engineering students. They are bright, alive with ambition. I ask how many are considering emigrating in search of work. Every hand bar one goes up. That's the image. There is no hesitation or reluctance, only certainty. For Ireland once again the best and the brightest are heading out - a generation lost to the still new worlds of Canada and Australia.

Then in Italy, in the late year's sun. A vast crowd is walking from the Colosseum towards Piazza Venezia. They are mainly students. Many have linked arms. At their sides hang motorcycle helmets which they will wear when they confront the police. In their shoulder bags they have thunder-flashes, flares - even rocks. Some are here to fight. Many don't want to be breakers, but they will get drawn in anyway because their frustration runs deep. This is a tinder-dry generation - with youth unemployment running at over 20%. As we neared the river they chanted "if you block us we'll bring down the city!" Let Rome in Tiber fall. And later the image - the numbers, helmets firmly on, fighting the police.

Italian youths clash with police in Rome, 14 Dec 10

Three snapshots that for me go to the heart of Europe in 2010. A story that cannot be understood through the procession of largely sterile summits. It had to be felt on the streets. A new generation is angry and resentful. In Spain unemployment remains at over 40% for those aged between 16 and 24. The stats are shocking. Hundreds of thousands of young people across Europe are not in work or in education. Many cannot afford to leave home. Most doubt they will be able to match the way of life lived by their parents.

They live in the new age of austerity - Europe's recently-acquired religion. After Greece was revealed as having faked its accounts the markets cast a critical eye on the country's deficit and forced up its borrowing costs. Greece stood on the verge of bankruptcy and had to be bailed out. Europe took fright and austerity package after austerity package was unveiled. They were deemed necessary to appease the markets but, in truth, Europe had been living beyond its means, cheered on by an indulgent political class careless of future generations.

So across the continent budgets have been slashed. Public sector wages have been frozen or cut. Benefits reduced. Even unemployment benefit has been tightened in places. The retirement age has been raised and student fees increased. Over the next few years hundreds of billions will be squeezed out of the European economy. And we are only at the beginning. In Portugal, for instance, austerity arrives with the New Year.

Youth unemployment and austerity are a dangerous cocktail that will play out on the streets of 2011. Austerity challenges a deeply-held idea of a European way of life where the state offers layers of protection. Old certainties are being swept away. Social contracts snapped. An ever-expanding public sector is being pruned. Europe, in the long term, may benefit from a smaller state sector, but no one should underestimate the shock of the new.

The main motivation behind these changes is to defend the euro - at least for those countries that use the single currency. Greece and Ireland have been put on austerity rations in exchange for a bail-out. Other countries are casting social programmes overboard in the hope of taming the bond markets. But here is the strange thing. Few people believe the medicine will work. Where will these countries find the growth from to repay the loans let alone their debts? Will countries like Spain be able to raise the money they need next year just to service their debt?

In 2011 the orthodoxy of austerity, I suspect, will be challenged. The Greeks are tiring of the lean years that seem to stretch out before them. A new government in Ireland may try and renegotiate the terms of the EU/IMF loan. Increasingly voices question the fairness of it all. In Ireland the banks' debts were taken onto the government's books and the country headed for insolvency. A proud country has sacrificed its independence - that's how many in Ireland see it.

It is a fair bet that in 2011 one or more country will restructure its debt.

Increasingly, when one returns from the streets of Greece or France or Italy, Brussels seems a side-show. While the unemployment lines lengthen for young people Europe's elite is preoccupied with institutions, with their place in the world. They have strategies for growth - but in the distant future. The discussions too often appear inward-looking. Occasionally there is a flicker of reality. The European Parliament, for instance, led the way in challenging bankers' bonuses.

As the European Council President Herman Van Rompuy said, 2010 has been about survival for Brussels. In truth they have been buffeted by events. The year's prize for influence goes to the bond traders. They, more than any institution or leader, have driven the agenda. As James Carville, one of Washington's legendary spin-meisters, once said, in a future life he wanted to come back as a bond trader because that way he would scare everybody.

The most powerful person in Europe, without doubt, has been Angela Merkel. Europe is changing because Germany is discovering its self-interest and confidence. It has probably the best economy in the world, with unbeatable brands. It has taken a ferocious amount of criticism for resisting becoming the paymaster of Europe. The fact is that since reunification Germany has made huge sacrifices and it is politically difficult to ask Germany to jeopardise its hard-earned success to rescue other European countries.

That internal debate in Germany - which surfaced in 2010 - as to whether it should look after Germany first or buttress European solidarity will be a defining feature of 2011 too. German voters will largely determine the future direction of Europe.

I would bet on the euro surviving, but there will be more crises on the way. It would be a mistake to underestimate the determination of a European elite to defend their project.

But 2011 is shaping up to be a year of upheaval in Europe.

Europe's leaders need to find the language to address this crisis. When I was in Dublin, Bill Clinton was in town. He made the point that you can't sell austerity without hope. That seems to me the challenge for Europe's leaders - what do they offer a young generation? Which is my final thought of 2010.

Thank you to all those who read my blog and contributed to the debate. And whether you've enjoyed, disagreed, or been infuriated by my take on events I wish you all an excellent Christmas.

Euro crisis unresolved

Gavin Hewitt | 16:33 UK time, Friday, 17 December 2010


To be fair to the EU's leaders as they headed out of Brussels the expectations for their last summit of 2010 had been low.

The tensions and differences between them over how to solve the crisis in the eurozone had been laid bare.

They were still meeting when Moody's delivered its own verdict by slashing Ireland's credit rating. A harsher judgement may yet follow.

The focus of the summit was creating a permanent safety net for the euro. But that will run after 2013 - and as I wrote in a previous blog, the fire is burning now. None of the leaders knows what the state of the euro will be in six months, let alone in over two years.

The hope was that the new mechanism would, in the words of European Council President Herman Van Rompuy, demonstrate "a common resolve" to fight for the single currency. It was hoped the mechanism would boost confidence.

But the summit has not addressed the fundamentals. Even those countries like Greece and Ireland that have been bailed out remain in dire straits. While embracing new austerity measures - to reduce their deficits - how will they find the growth to both repay the loans and to reduce their debt loads?

Many economists don't believe the sums add up. They believe the debt loads are unsustainable. And then they cast an eye over other countries' spreadsheets and question how they will meet their funding needs for 2011.

Meanwhile the gulf between the weaker economies and Germany's only grows. Although there will be further banking stress tests in February it is apparent that many banks remain nervous over their exposure to these countries on the periphery of the eurozone. And although countries like Spain and Portugal are unveiling structural reforms, like in the labour market, they come very late in the day. They will take time to have an impact and perhaps increase competitiveness.

So the markets remain unconvinced. Fabio Fois from Barclay's Capital summed up the reaction when he cast the summit as "another missed opportunity to calm the markets".

French President Nicolas Sarkozy talks to German Chancellor Angela Merkel

In recent weeks ideas for solving the crisis have been tumbling out. Few were even discussed at the summit. There was no discussion over increasing the size of the current rescue fund, or whether it could be used to buy bonds or open up credit lines to places that were under pressure.

The idea of the eurobond did come up at dinner - much to the annoyance of Germany's Chancellor Angela Merkel. She believed that she had shut down the debate, but the head of the European Central Bank, Jean-Claude Trichet, brought it up anyway. Afterwards the Italian Prime Minister Silvio Berlusconi said "Merkel is very opposed, but many others are interested, not least because Europe need only provide the guarantee."

Mrs Merkel is not only opposed to sharing the credit risk across 16 nations, which would undoubtedly see Germany's borrowing costs rise, but she believes it would let weaker countries off the hook. But this argument looks set to be rejoined. It hasn't been closed down.

What this summit did underline again is Germany's dominance in Europe. Mrs Merkel got her way over a limited treaty change. She insisted on it out of fear of the German Constitutional Court. The permanent mechanism will only be activated if it is seen as indispensable "to safeguard the stability of the euro as a whole". In other words, the conditions for being rescued will be tough and Germany will have a veto.

Mrs Merkel, who is aware of her critics in Europe, said "we are doing everything to make the euro secure".

David Cameron seized the opportunity of the summit to fire some opening shots in the battle over the 2014-2020 EU budget. He penned a letter seeking support to freeze the budget in real terms. The letter, intended more to put down a marker than to lay out a negotiating position, was supported by the French, the Dutch, the Germans and some others. Mr Cameron raised this to, in his words, "stop the budget getting out of control". Now the Poles are furious. They fear a tighter budget will squeeze some of the funds heading their way.

The big test for the EU is whether it is prepared to trim its bureaucracy and be honest about the layers of waste. When the budget negotiations begin in earnest one of the interesting trade-offs will be between Britain and France. The UK wants to keep its rebate and the French will defend the Common Agricultural Policy.There may be grounds there for an alliance.

The euro: a crisis that defies answers

Gavin Hewitt | 11:58 UK time, Thursday, 16 December 2010


For the seventh time this year Europe's leaders are in Brussels for a summit.

Most of the previous meetings have been marked by up-beat statements that they stand fully behind the euro and that the crisis is on the way to being solved.

German Chancellor Angela Merkel

Even before the motorcades arrived we were treated to the same chorus. "We will show our desire to do everything to assure the financial stability of the zone," said Jean-Claude Juncker, the head of the Eurogroup.

In truth Europe does not yet have a convincing answer to the crisis and the financial markets know it.

Some of the energy at this summit will go towards agreeing treaty changes to the Lisbon Treaty to allow for the setting up of a permanent bail-out fund beyond 2013. Germany would like to see help to other countries in financial distress only being given "in the last resort." There may be some resistance to that.

Most countries do not want treaty changes. The pressure comes from Germany which fears that its Constitutional Court could challenge a permanent mechanism that sets in place precisely what was supposed never to happen - a bail-out fund.

So the treaty changes will be as limited as possible. There is a deep-seated fear in Brussels of having to consult the people in a referendum.

Britain's position is that the new mechanism does not apply to the UK as it is not in the eurozone. It will back the treaty changes but the government will insist that no referendum is needed as the changes do not apply to the UK.

In the draft document there is an undertaking that non-euro states do not have to get involved with the mechanism. Britain is hoping for some form of wording that makes that explicit.

But the European Stability Mechanism will come into force in 2013 and the fire is burning now. The truth is that for the weaker eurozone countries the borrowing costs on the bond markets are too high. Spain was warned yesterday that its debt could be down-graded. Belgium, too, has been shown a yellow card.

The fact is that the current medicine is not working. Greece and the Irish Republic are having to embrace severe spending cuts. No one can see where the growth will come from to pay down those debts.

The markets think the debts of Greece, Spain and Portugal are unsustainable. Next year Spain has "high-financing needs". It will have to raise 170bn euros. The markets doubt it can be done.

There is increasing resistance in Greece and Ireland to what may prove to be a "lost decade" - ten years of cutbacks.

The riots in Athens yesterday against the latest cuts were the worst since May. In Ireland the opposition - who are most likely to win the next election - have said they feel no obligation to honour Ireland's banking debts and they may well try and renegotiate the EU/IMF loans.

There are many who say that eventually some of these debts are going to have to be restructured.

So what options do Europe's leaders have?

First, some are pushing to expand the European Financial Stability Facility, which at 440bn euros is the main bail-out fund. Some have suggested the fund should be doubled to indicate to the markets that, even if countries such as Spain or Italy needed help, Europe's pockets are deep enough.

The think-tank Open Europe says that the "real amount available could actually be closer to 410bn because not all the countries that signed up to the fund will be able to contribute due to the poor health of their own public finances".

Germany, for the moment, is insisting no new funds are needed.

Second, some want a robust statement of total commitment to the euro. That has been expressed before - and only yesterday Chancellor Merkel said "we know that the euro is our collective destiny, and Europe is our collective future". But statements on their own rarely move markets.

Third, the ECB can intervene and buy government bonds. Most people see that as trying to hold the line. It is not a solution.

Fourth, there are those who believe that the countries in the firing line have to undertake radical structural reforms to make their countries more competitive.

The trouble is that Spain and Portugal have appeared as reluctant reformers. They are still - at this late hour - unveiling changes. Jean-Claude Juncker said today that Spain and Portugal needed to give more details of structural reforms to "clear up how they plan to put their own fiscal house in order".

Fifth, there are those who calling for the banks to be re-capitalised. George Soros pointed out "the bondholders of insolvent banks are being protected at the expense of taxpayers and this is unacceptable".

Others like Simon Tilford from the Centre for European Reform have long argued that the only true remedy is fiscal union. However, he concedes, the "political obstacles to such a union appear insurmountable".

Ultimately he believes the euro is unlikely to crack. "EU leaders," he says "will do whatever it takes to save the euro, short of setting up a fiscal union".

In a paper entitled "Beyond Maastrict: a new deal for the Euro-zone" from the European Council on Foreign relations, Thomas Klau and Francois Godement set out what they see as two versions of Europe's future.

"It can continue to stumble through piecemeal reform," they argue, hoping "for the crisis to abate and... leave it to the financial markets to impose fiscal discipline and austerity measures."

The policy they argue will lead to permanent tensions and rising national resentment across the EU. The second and better choice, in their view, would entail a new grand bargain involving Germany which would agree "to endow the eurozone with a panoply of instruments giving Europe the economic and political cohesion it desperately needs to succeed in a world of rising superpowers. "

So, on the sidelines, big questions are being asked about the future of the EU. For the moment - and at this summit - the EU will give an impression of clinging on and muddling through.

Berlusconi survives storm

Gavin Hewitt | 14:57 UK time, Tuesday, 14 December 2010


ROME In the end Silvio Berlusconi survived as he has done so many times in his tempestuous career. He defeated a no-confidence motion by three votes in the Chamber of Deputies.

It was a moment of high drama. The Italian prime minister has dominated his country's politics for the best part of 15 years. Parliament was ringed with police wagons. Protesters shouted "you have bought the votes like you buy your women!" In the chamber there were brief scuffles.

Demonstrator hurls a flare in Rome (14 Dec 2010)

On the streets students and workers marched towards Piazza Venezia. Some came with motorcycle helmets and rocks, flares and thunder flashes.

Some bottles and rocks were thrown at the closest point to Berlusconi's residence, but the first major clash came outside the Senate. We watched as rocks, bottles and tiles were hurled at the police. They replied with tear gas and a baton charge.

Then there was a moment of confusion. The word reached the crowd that Berlusconi had been defeated. Some of the students danced and then embraced each other. They dislike him not just because of his way of life and the scandals involving girls and parties. They oppose the planned increases in student fees and the closures of certain smaller universities.

Then the news filtered through that in fact Silvio Berlusconi had scraped through. The mood turned angry. Some protesters began attacking banks and smashing windows. I watched an attempt to set fire to one bank.

Some of the crowd, however, believed that today's vote had hastened the end of the Berlusconi era. His hold on power is down to a handful of votes. He has been weakened and it will be much more difficult to get his legislative programme through.

Italy looks destined for a period of instability, with the most likely outcome elections in the New Year. Silvio Berlusconi will fight and may still win. He has a strong base but his grip on power has been loosened. Italian politics - as they have been before - will now be fractious and bitterly fought over.

Berlusconi's last days?

Gavin Hewitt | 08:55 UK time, Monday, 13 December 2010


In ancient times the augurs would have been consulted. The ruins have been trembling. Chunks have fallen off the Colosseum. The House of the Gladiators at Pompeii has collapsed. The wall surrounding the House of the Moralist has buckled.

Everyone is searching for signs. Even the Italian President, Giorgio Napolitano, opined that you would need a crystal ball to know whether these are the last days of the great impresario, of Il Cavaliere, the self-styled knight who has come to dominate Italian politics.

Silvio Berlusconi will make a fight of it. Revelations are dismissed as "trash". Accusers are branded "traitors". On Tuesday he faces two votes. In the Senate they will vote on a motion of confidence that he will almost certainly win. A no-confidence vote in the Chamber of Deputies, however, will be much closer.The word is that it may come down to one vote. It's that close. If Berlusconi were to lose he would have to resign. The Italian president would explore whether anyone else could hold a working coalition together. If not there would be elections. Berlusconi could of course stand again, but a comeback would be much harder.

Italian PM Silvio Berlusconi, 10 Dec 10

Rome is awash with intrigue - that MPs have been offered government jobs or even help with their mortgages to support the Italian leader. One opposition politician complained it was humiliating, like watching "a cattle market". Another, Pier Luigi Bersani, said "a crime is being committed in parliament". It is a world of deal-making and horse-trading in which Silvio Berlusconi excels and no-one is counting him out. If everyone who said they would vote against him did, he would be finished. But Roman politics isn't like that. Strange alliances emerge from late-night meetings.

As for Berlusconi, he relishes the fight. He lashes out at what he calls the lies and slander. One of his papers has shown pictures of what they call "traitors"; those who in recent times have deserted Il Cavaliere. "For several months," says Berlusconi, "public life has been paralysed by an irresponsible political crisis". He will begin this struggle to save his job with a speech to the Chamber of Deputies.

His opponents see it differently. They see a coalition that has cracked - weakened by defections, rivalries and in-fighting. A split with a former ally, Gianfranco Fini, cost him his parliamentary majority.

The Italian leader has survived countless scandals. But then came along Ruby the heartbreaker. She was a 17-year-old dancer who says she attended one of Berlusconi's parties. He apparently lavished her with gifts and money and when she got into trouble with the police he intervened, saying she was a relative of the Egyptian leader. This time it wasn't just the girls. The questions were about abuse of power. Other women like Nadia Macri have emerged, who said of one of the parties "the girls were young and it didn't sit easily with me".

Dancer known as Ruby, 12 Nov 10

And the gaffes continued. When questioned about the young women he quipped "at least I'm not gay". Everyone in Italy now knows what bunga-bunga means. According to girls who were at his parties, this was a nude ritual that involved the Italian leader. When, earlier, some Italian women got together and said all this offended them Berlusconi retorted "How can anyone say I don't love women?"

Many Italians, however, say they are uninterested in stories about their leader's private life.

And then came along Wikileaks, with messages questioning Berlusconi's close relationship with the Russian leader Vladimir Putin. An American diplomat described the two men as "tycoon oligarchs". Berlusconi's partying left him "feckless, vain and ineffective". And the American diplomatic cables raised suspicions that Berlusconi was personally profiting out of energy deals with Russia.

The US Secretary of State, Hillary Clinton, tried to offer a helping hand by describing him as "one of America's best friends". But the polls suggest Italy is tiring of the leader who promised to reform the country.

So what is likely to happen? Berlusconi is helped by the opposition. Its leaders lack conviction or a programme at a time of economic crisis. It has enabled Berlusconi to play the stability card, to insist that "apres moi, le deluge". So with the bond dealers watching Italy closely Berlusconi's friends are saying this is the wrong time to change leaders. They say that Italy has escaped the worst of the financial crisis and an early election would be unsettling and unpopular. A budget of austerity cuts has just been passed, but needs to be implemented.

If on Tuesday, however, his majority is razor-thin it could still prompt early elections in April. Gianfranco Fini says that "if the no-confidence motion does not pass we will have a government that's just trying to survive. That's not stability. That's vegetating."

Whatever the outcome there are people predicting these are Berlusconi's last days. "The one-man show is over," said the powerful businessman Luca Cordero di Montezemolo. A leading commentator, Beppe Severgnini, said "it is an old Italian tradition that the tenor is idolised until people start booing him".

No-one should underestimate the extent to which Silvio Berlusconi dominates Italian politics. He owns three major commercial TV channels and a cluster of papers and magazines. When he is in power he has responsibility for the state broadcasting organisations. He has shaped prime-time TV with its parade of show-girls that are known as veline "scraps of paper". Women's groups say the television culture treats them as "sex objects". Without any sense of irony a former topless model, Mara Carfagna, was appointed as Minister for Equal Opportunities. Then the opposition claim he has evaded charges of corruption by undermining the judiciary.

More than any other current European leader Berlusconi has defined the culture of his country. If he goes Italy changes.

The un-European

Gavin Hewitt | 18:44 UK time, Thursday, 9 December 2010


As a student of American history, I was always intrigued by the House Committee on Un-American activities.

The search for disloyalty. The taint of being a dissenter. The fear of subversives.

The list of spies brandished by Joseph McCarthy, the Senator from Wisconsin. McCarthyism had its roots in the paranoid strain of American politics.

Senator Joe McCarthy 10 March 1959

I was reminded of this when I heard Jean-Claude Juncker, the Chairman of the Euro-Group, brand German thinking as un-European.
His ire had been stirred by Berlin's quick rejection of his advocacy of euro-bonds.

Now I am not suggesting for a moment that Mr Juncker is seeking to expose those he deems disloyal to the European project. His appeal, I suspect, was to "solidarity". But to be labelled un-European is not a light jab.

The German paper Frankfurter Allgemeine Zeitung, as quoted by the think-tank Open Europe, asked "is it European to bend the EU treaties and break the bail-out plan?"

And that is the difficulty in assessing who is the good European. The longer the crisis in the eurozone defies solution the more deep-seated the tensions that emerge.

The President of the European Council, Herman Van Rompuy, recently opined that Euroscepticism led to war. Extreme nationalism, of course, has resulted in terrible European tragedies. But Euroscepticism?

His comments came just days after David Cameron had declared himself a Eurosceptic in Brussels. On clarification, President van Rompuy was referring to those who were against the EU.

The fact is there are different visions of what makes for a "good European". Helmut Schmidt, the former German Chancellor, recently scolded the Bundesbank for being opposed to European integration.

Former German Chancellor Helmut Schmidt (November 2010)

At the same time he said it was a mistake for some of the peripheral countries to join the euro in 1999. It raises the interesting question as to whether those who pushed for the wider eurozone were the "good Europeans" or those who pointed out the risks of such different countries sharing monetary union.

It is part of the culture of Brussels that people are labelled as either with the project or against it. More often it is just that people have different visions for Europe.

But, as I say, these various comments reflect anxiety and tension.

All of this was in the Brussels buzz on the day when Greenpeace and Avaaz handed in a petition signed by over a million people under the new citizen's initiative.

One of the reforms embedded in the Lisbon treaty was to close the "democratic deficit" by enabling citizens to collect over one million signatures and so exercise the right to put forward initiatives.

Avaaz and Greenpeace had collected the signatures to back a halt to genetically-modified crops until safety testing is made thorough, independent and scientific.

The legislative process for the citizens' initiative has not yet been finalised and this particular petition may well fail but there is a wider issue at stake here.

This act of direct democracy must be treated seriously, according to the Greens. Avaaz Executive Director Ricken Patel said: "This is a massive step for European Democracy. The rapid response shows that citizens are excited to engage with this new democratic instrument to re-insert a democratic voice into EU policy."

Of course one million signatures does not guarantee the Commission will change its mind. But this will be an interesting area to watch.

Will these initiatives influence thinking? Consulting the people does not have a happy history in the EU. Negative votes on the Lisbon Treaty were side-stepped. Referendum is a dirty word for many officials; a process that at all costs must be avoided.

But the period of the citizens' initiative has arrived. All you need is a million signatures from across several states. Comissioner Dalli said: "I can assure you that there is a political will to listen to everybody and one million signatures is a voice that we should listen to."

Perhaps that will be one of the tests of being a good European.

Where now for the euro?

Gavin Hewitt | 13:05 UK time, Wednesday, 8 December 2010


Another round of meetings concludes. The limousines carrying Europe's finance ministers head to Brussels airport. Only to return next week. No one believes the eurozone crisis has been fixed. Some band-aid is in place.That's all.

The search is on for the holy grail - the formula that fixes the single currency and returns it to stability.

The head of the IMF, Dominique Strauss-Kahn, has attacked the current "piecemeal" approach. "The EU," he said, "needs a comprehensive solution to the debt crisis. It can't be done on a country-by-country basis."

A Portuguese broker, 30 Nov 10

Yet the differences between members of the eurozone are real and cannot easily be smoothed away.

Take the idea of a eurobond (E-bond). It is a suggestion that has been around before. Using an article in the Financial Times the chairman of the 16-nation Eurogroup, Jean-Claude Juncker, and the Italian Finance Minister, Giulio Tremonti, tried to engineer it onto the agenda.

Not surprisingly the Portuguese came out as enthusiasts for the E-bond. "Europe's monetary union," said Portuguese Treasury Secretary Carlos Pina, "is missing solidarity mechanisms between countries and we consider that the mechanisms are insufficient ".

It remains true that the weak and vulnerable like to appeal to "solidarity" while the strong are less persuaded. The Germans were quick to reject the E-bond. They saw it as a way of enabling debt-prone countries to avoid the judgement of the markets. Juergen Stark, a German board member of the European Central Bank (ECB), pointed out that "each country needs to be held responsible for its own debt". The German paper Bild ran a headline that said "EU wants to make euro soft".

All of this has clearly irritated Mr Juncker. He said "Germany's thinking is a bit simple on this". He went on to say that the "proposal is being rejected before it has been studied".

There were similar divisions over whether to increase the bail-out fund, the European Financial Stability Facility. The IMF - among others - believed a bigger pot would dispel fears that there wouldn't be enough resources to help Spain if it cried out for help.

Interestingly, it was not just Germany who opposed adding to the fund. The Dutch, the Austrians and the Finns were all decidedly reluctant. Within those countries there is increasing opposition to supporting bail-outs. The mood is disturbing some in the Brussels hub. "I am worried," said Economy Commissioner Olli Rehn, "about the divergence in the public debates between the northern and southern countries".

So where does this leave the euro crisis?

The pressure will remain on Spain and Portugal to reduce their deficits. Eurozone ministers were quick to applaud Spain for increasing the retirement age, hiking the tobacco tax and selling a significant share in the state-owned lottery and in a couple of airports.

Ministers hope the ECB will continue buying bonds, particularly if either Italy or Spain come under pressure. But this is seen as more of a "holding tactic" rather than a solution.

There will be a further round of stress tests of the banks in February.

There is always the hope that growth will gather pace and ease the pain, but many believe that 2011 will actually see growth slacken.

None of these measures, of course, addresses how some of the weaker countries will bring down their debts. Austerity measures will surely dampen demand and will herald a tough decade of low growth and wage restraint. Greece almost certainly will be granted more time to pay back its loans. Even then it is hard to see where the growth will come from to significantly pare down its debts.

That is why many observers believe that some restructuring of sovereign debt is inevitable. That move is not even countenanced by Europe's finance ministers, but the markets believe it will happen.

The argument over the way forward will be had most keenly in Germany. Yesterday the former German Chancellor Helmut Schmidt lashed out at the Bundesbank, which he called "reactionary" and opposed to European integration. He said Chancellor Angela Merkel was "not acting very cleverly".

But Helmut Schmidt comes from a generation when it was much more accepted that the German and European interest were entwined.

A debate is under way in Germany over how to stabilise the single currency, but at heart this has become an examination of what an increasingly confident Germany wants from Europe.

What the cables tell us about Europe

Gavin Hewitt | 11:52 UK time, Monday, 6 December 2010


All that gathering. All that note-taking. Hundreds of thousands of cables arriving electronically in Foggy Bottom in Washington.

On the surface the Wikileaks revelations are the stuff of asides at diplomatic receptions. President Sarkozy has a "thin-skinned and authoritative style". Chancellor Merkel is "risk-averse". David Cameron is seen as "lacking depth". Prime Minister Berlusconi is regarded as "vain". As for Vladimir Putin, well he's the "alpha dog".

The United States has always attached great importance to understanding leaders. The CIA employed for many years - and probably still does - a team of psychiatrists whose job it was to analyse the inner lives of men like Cuba's Fidel Castro and former Soviet leader Leonid Brezhnev. They wanted every detail about what they ate, who they loved, about the state of their health. It was a question of "know your enemy".

Even with friends, Americans have an insatiable appetite to know. More often than not what is delivered are snap judgements that diplomats, politicians and journalists make all the time.

Whether it was right to publish is a separate question. We often have no way of knowing the context in which these notes were made. Some flesh out character. But contained within these diplomatic sketches are serious issues, and in Europe there could still be fall-out from these revelations.

Wikileaks website, 1 Dec 10

The Americans clearly see Angela Merkel as by far the most important leader in Europe. There has not been a German leader as powerful and influential probably since World War II. Yet the cables don't warm to her. They find her "risk-averse and rarely creative". She is the "ultimate Teflon politician", who seems to avoid bad news sticking to her. Less flatteringly, one cable says that she "promotes incompetent people to make her look better". She is "circumspect" and "unimaginative".

Certainly her style is to move cautiously, as was revealed at the start of the eurozone crisis, when she hesitated over whether to abandon the EU's "no bail-out" commitment and help Greece. When cornered, the American diplomats say, she can be tenacious. The eurozone crisis has revealed her taking a tough line but retreating under pressure.

But step-by-step she is moulding Europe to the German way, where countries have to live within their means or face severe consequences.

Apart from the fact that the chief of staff in her foreign minister's office was passing information to the Americans she, on this viewing, will not be unhappy with what has been revealed so far.

An early judgement going back to 2005 is that Nicolas Sarkozy is pro-American. He is "very much unlike nearly all other French political figures, Sarkozy is viscerally pro-American," reads one cable.

There is a revealing passage where Sarkozy talks about himself to a diplomat. "They call me Sarkozy the American," he said. "They consider it an insult but I take it as a compliment." The cable goes on to say that "Sarkozy said how much he 'recognised himself' in America's values".

Italy PM Silvio Berlusconi, German Chancellor Angela Merkel and French President Nicolas Sarkozy at G20 in Seoul, 12 Nov 10

But for that, the Americans are wary. "Just being in the same room with Sarkozy is enough to make anyone's stress levels rise." He is described as autocratic, over-sensitive to criticism and surrounds himself with "yes" men. He is an emperor without clothes.

It is not a damning assessment, but these portraits will feed into the minds of the voters when they decide whether or not to re-elect Sarkozy in 2012.

The American assessment of Italy's Silvio Berlusconi is more serious. On the one hand a charge d'affaires notes that he has a "penchant for partying hard (which) means he does not get sufficient rest". They see him as "physically and politically weak". He is seen as " feckless, vain and ineffective".

But there is much more here than a pencil-sketch of another leader. The ambassador to Rome, Ronald Spogli, reports two years ago that Berlusconi has taken "single-handed" control of Italy's dealings with Moscow. He is described as the "mouthpiece of Putin". The Putin family is reported to be "spending long visits at the Berlusconi mansion in Sardinia at Berlusconi's expense". The two men are seen as "tycoon oligarchs".

The Italian leader is portrayed as championing every Russian initiative. He consistently "rejects the advice of a demoralised, resource-starved and increasingly irrelevant foreign ministry, in favour of his business cronies".

And then a suspicion. A US diplomat wonders whether Berlusconi was "personally and handsomely" profiting from energy deals with Moscow. Last week Berlusconi insisted that "there has never been a single personal interest" in his contacts with Russia.

These are serious issues and come at a dangerous time for the Italian leader. Next week he faces a vote of confidence. The US Secretary of State, Hillary Clinton, tried to soften the damage by describing him as "the best friend of America", but the cables are out there. If he has to resign it won't be because of the cables, but Italians will feel a pang of embarrassment at how outsiders see their leader.

Then there is a meeting between a US ambassador and Herman Van Rompuy, just after he has been appointed President of the EU Council. Van Rompuy says the Europeans have all but given up on the Afghanistan mission. He says the EU no longer believes in success in Afghanistan and that troops are there "out of deference to the US". "No one believes in Afghanistan anymore," he continues. And he adds that "if a Belgian gets killed, it would be over for Belgium".

It is hard to know the full context of this conversation, but it raises disturbing questions: the implication that servicemen and women are giving their lives for a political gesture; that troops are being deployed on a mission no one believes in; that a nation might cut and run after a single casualty.

Herman Van Rompuy was dismissive of the current climate change conference in Cancun. "It would be a disaster as well (as Copenhagen)," he predicted. His concerns about Copenhagen were less about what had been achieved for the planet but more that Europe had been "totally excluded" and "mistreated".

"Had I been there," he continued, "my presidency would have been over before it began". The EU leadership does not like large multi-national conferences but would prefer a world where the EU and US reach an understanding and then talk to the Chinese.

What this brief cable underlines is the determination in Brussels to promote Europe as a player on the world stage. Van Rompuy told the ambassador that he "planned to take control of getting Europe on the same page".

And, of course, that won't be easy. Why? Well, the answer lies in the other cables that reveal Europe's leaders as big personalities who very much follow their own agendas.

The German dilemma

Gavin Hewitt | 10:37 UK time, Thursday, 2 December 2010


As each day passes the scale of the eurozone debt crisis only seems to deepen. Comfortable illusions of the euro having been saved are swept aside. The list of those who might need rescuing only lengthens.

All eyes were on Spain and Portugal, but then doubts began emerging about Belgium and Italy.

Conditions may ease and confidence may return but, on the other hand, they may not. Further bail-outs will bring closer the day when Germany will have to make a big
decision. Is it prepared to bankroll Europe - not just now but for the foreseeable future?

Will the country that carried the burden of reunification - put at more than a trillion euros to date - be ready to take on the debt of a string of battered economies?

Shoppers in Berlin - file pic

Germany accounts for a third of the eurozone's economic output. It expects growth this year of 3.4%. The German Economy Minister, Rainer Bruederle, says he believes growth will be strong for the next four to five years. Germany's influence has never been stronger within the European Union. It may be resented, but it alone has the financial muscle to count in the face of the debt crisis.

Recently the head of the Eurogroup, Jean-Claude Juncker, mused that Berlin was "slowly losing sight of the common European good".

To date it has made the largest contribution to the 110bn-euro (£92bn; $144bn) Greek bail-out. The same is true with the Irish rescue. The funds earmarked for those countries are in loans, but there is a significant risk that down the road those countries will not be able to make their repayments.

If other larger countries needed helping Germany's exposure could be huge. For a start there is no point bailed-out countries contributing to any rescue fund, so Germany's share would only grow.

At some point a great debate would begin as to whether Germans were prepared to accept the EU being, in effect, a transfer union.

It is worth recalling that the German Constitutional Court only endorsed monetary union on the basis of a no bail-out clause. That was the condition on which the Deutschmark was surrendered. Already that clause has been as good as ditched.

The German strategy has been to talk tough and then to retreat. It held out against helping Greece, only to back down in the face of EU pressure. Greece was considered a one-off but then, in a late-night meeting in Brussels, Germany agreed to the 750bn-euro European Financial Stability Facility. The German public was told that it was unlikely this fund would ever be tapped. It was there to shock and awe, to show the markets that you couldn't bet against the euro.

The German government wanted tough action against those governments that ran up excessive debts in the future. Chancellor Merkel at one point suggested that serial offenders could be forced out of the eurozone. That idea was quietly dropped. She wanted sanctions and proposed a withdrawal of voting rights, but met fierce resistance from other leaders. She wanted sanctions to be automatic. They almost certainly won't be.

Then more recently Mrs Merkel raised the idea that private investors should share in some of the losses. Many agreed with her, but it spooked the markets. At the G20 there was a clarification. Such a measure would only apply after 2013.

And then, when last weekend a permanent rescue facility was discussed, the line was weakened further. Investors would only take a hair-cut if a country was declared insolvent. That, for instance, would exclude Greece at present.

The German finance minister said the question of increasing the size of the rescue fund had not arisen, but Germany is now committed to a new permanent mechanism beyond 2013 which, of course, will have to be funded.

Germany, like the rest of Europe, is being driven by events. Chancellor Merkel is under pressure. She knows that many Germans did not want to help the Greeks. The newspaper Bild declared it was "scandalous" bailing out the Irish, with their low corporate tax rates.

Yet at the same time she is committed to saving the euro. She has tried to rally support at home by saying that if the euro fails then the whole European project is at risk. The political class in Germany is strongly committed to the euro's survival.

It is frequently pointed out that Germany has benefited from being in the euro; the rate at which it entered has favoured its exports. Its banks are heavily exposed in countries like Ireland. So there is self-interest in fighting for the single currency

But there would come a point when that consensus would crack. The German economy was recently praised in a column in the Washington Post as "the strongest in the world". It is a source of immense pride. It has world-class manufacturing brands. It has preserved the Mittelstand - those middle-sized, family-owned businesses that are the rock on which the economy is built.

After having so painstakingly built their economy there would be huge resentment at seeing their money flowing to shore up less efficient and less hard-working parts of Europe.

Ulrike Guerot from the European Council on Foreign Relations says that Germany has "fallen out of love with Europe", which has become too tiresome and too expensive. "For most of Europe, Germany is the big winner of the euro," she writes, "whereas many Germans today believe that they have always had to pay for the others and have always been cheated."

Germany's State Minister for European Affairs, Werner Hoyer, told Der Spiegel that he is frequently asked by his colleagues "do you still stand by Europe?"

The answer, for the moment, is "yes". This year I have met many Germans who still believe in European solidarity. But future rescues will place that under strain and pose a challenge to Germany's political leadership.

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