EUROPEAN DIARY:There is a growing consensus that the recent euro group summit was historic, but no one yet knows if in a good or a bad way, writes ARTHUR BEESLEY
FRENCH finance minister Christine Lagarde dismissed as “rubbish” a report in Spanish daily El Pais that President Nicolas Sarkozy threatened to take his country out of the euro if Germany did not intensify its efforts in defence of the currency.
Whatever truth there might be in the claim that Sarkozy pounded the table as he pressurised German chancellor Angela Merkel at the euro group dinner summit last Friday week, the encounter seems to have been exceptionally fraught. Informed sources speak of “chaotic” scenes around the dining table as Herman Van Rompuy, president of the European Council, struggled to maintain order.
Sarkozy, they say, had Merkel in his sights – and European Central Bank (ECB) chief Jean-Claude Trichet too. From Merkel, he wanted a promise that Berlin would cast aside its ambivalence about support for the euro. From Trichet, he wanted a commitment that the ECB would buy debt from distressed euro countries.
His entreaties did not go down well. That Merkel does not take well to orders from Paris is a given. Sources also speak of shouting matches as Trichet, a Frenchman, defended the ECB’s independence and insisted it would not take any policy direction from the Élysée palace, or any other capital.
It was past midnight by the time the summit broke up, the leaders having set in motion the creation of a mammoth rescue fund for distressed members of the single currency. When Sarkozy emerged, he seemed to be buzzing with adrenalin.
Standing before a brace of national flags – as if speaking for all euro leaders – he unleashed torrents of invective about the euro’s moment of truth, the need for greater “economic government”, and an imminent, unsparing clamp-down on speculators.
It was heady stuff. Two days later came an 11-hour conclave of finance ministers, who resolved with the IMF to set aside €750 billion for the bailout fund. At the same time, the ECB declared it would intervene in the sovereign debt market to buy bonds from euro governments. Trichet insisted there was no dilution of the bank’s prized independence – and no capitulation to political pressure.
Around Brussels these days, the sense is that these engagements could yet prove to be historic. What nobody yet knows, however, is whether that means historic in the positive or the negative sense. Within a matter of days, the debt crisis suddenly morphed from a Greek affair to a serious threat to all euro countries and the wider sovereign debt market.
Paul Volcker, former chairman of the Federal Reserve, summed up the apprehension when speaking of the euro’s “potential disintegration”. Fear of such an eventuality is implicit now in every move to shore up the currency, as markets question the extent to which European leaders can quickly regain control over their public finances and reduce their dependence on debt.
Thus austerity is the new vogue, with Spain and Portugal rushing out drastic cost-cutting plans last week in a bid to shake off market pressure. Others will have to follow, with Ireland’s drive to tame its wayward deficit being held up as a shining example of resolute corrective action. Then there is pressure from European Commission chief José Manuel Barroso to open national budgets in Brussels before parliament as a means of aligning economic policy throughout the currency area.
This presents a cocktail of nasty choices for EU leaders, many of whom seem more comfortable in the local arena than in the European amphitheatre.
Previously, they were free to do as they pleased in a currency system that did not hold debt-addiction to be any great sin. Now, national exchequers are on the hook for billions of euro if markets close to neighbouring countries. Furthermore, the drive to cut spending and increase tax creates social tensions of varying degrees. Add in the push for far-reaching policy co-ordination from Brussels and there is big potential for further pain down the line.
None of this is remotely appealing in electoral terms, for voters rarely give thanks for the avoidance of catastrophe. For a neat illustration of that, look no further than Merkel’s setback eight days ago in North Rhine-Westphalia, a regional poll which deprived her of a majority in the upper house of parliament.
That these are early days in the battle to save the euro only adds to the pressure. How would countries react, for example, if Greece didn’t repay the entirety of the bilateral loans that kick in this week? In the Berlaymont building in Brussels, home of the European Commission, officials point to a maxim set out years ago by Luxembourg’s long-serving prime minister, Jean-Claude Juncker: “We all know what to do, but we don’t know how to get re-elected once we have done it.”
If this stands as a powerful summary of one of the fundamental dilemmas in political leadership, it seems obvious at this point that the euro’s fate will be determined by the calibre of leadership shown. In a good or bad way, legacies will be made of this affair. The rescue fund does no more than “buy time”, says Merkel.