The dramatic clashes over Greece, which boiled over in Saturday's meeting of euro group finance ministers, surely have major implications for the future of the single currency area.
Its members have split, highlighted in the rupture of the Franco/German alliance, and at the heart of this are fundamental differences in view over how the single currency area should operate. Whatever happens now, whether Greece stays in or leaves, the implications of this have to be significant for the future of the euro.
Part of the problem, of course, is the ponderous way crises are confronted and decisions are made. So yesterday’s make or break meeting did not reach a final conclusion. EU finance ministers meet again today after yesterday breaking up in acrimony.
There is talk of demanding that Greece implements certain key measures by the middle of next week, as part of a move to giving the green light for further bail out talks. But such are the tensions that it could also yet all fall apart, triggering a Greek euro exit.
The euro zone leaders will today be asked to sign off on whatever the finance ministers decide – or perhaps bridge some remaining gaps. Or to deal with the consequences of a failure by the finance ministers to agree . This is against the backdrop of political opposition, from Finland in particular to a new bailout , but also from a half dozen other countries.
The Tsipras government will also have to sell any additional measures at home and there is talk of a government reshuffle. Whether it will be offered any indication of future debt restructuring remains unclear .
If the leaders agree to keep the ball rolling , the terms on which they do this will have a key impact on whether the ECB will see its way on Monday to producing any additional funding for the Greek banking system. If it doesn’t, we are told the banks are in danger of collapse. Perhaps they can hold out for a few more days, but the damage to them and to the wider economy is now immense.
Greece also has debt repayments looming, particularly €3.5 billion due to the ECB on July 20th and needs the bailout agreed to pay these. Time is now one of the country’s biggest enemies .
If the euro zone leaders’ meeting breaks up in acrimony, then the ECB may feel it has to immediately withdraw its existing emergency support, triggering a chaotic collapse in the Greek banking system and what would appear to be an inevitable euro exit.
So what did we learn from the eurogroup meeting?
The first revelation was the existence of a plan in the German finance ministry which suggested that Greece could “temporarily” exit the euro zone for five years, or alternatively pledge € 50 billion of state assets to pay down against its debt.
The temporary Greek exit idea has floated around in recent weeks, but its emergence in a German paper on the day of the summit is surely not coincidental. Some reports suggest it also had the support of chancellor Merkel, but such was the hothouse of rumour yesterday that this should not be taken for granted.
This raised the prospect that at least some parts of the German government actually want Greek exit, rather than just threatening it as a bargaining tool to try to get Greece to reform. The idea of a temporary exit is extraordinary, immediately turning the euro zone into a system where members could “check out” when in trouble. It would undermine the whole idea of the single currency, and many of its advantages, while the prospect of a country re-entering, having left, would be remote.
Second, we saw the strength of opposition to a Greek bailout in a number of other countries, The presence of the True Finns party in the Finnish government meant their finance minister had instructions to oppose a bailout, after what Finnish media said was a row which almost brought down the government.
Spain also has serious reservations, as had Slovakia, the Baltic States and Germany's old ally, the Netherlands. In what it judged to be an "emergency" – where the EU Commission and ECB judge there to be a significant risk to financial stability – an 85 per cent majority vote based on a weighting system ( bigger countries have more votes) can enable a decision. So Finland could not block on its own. But political opposition across Europe is a huge issue to be surmounted today, if there is to be a deal.
Third, the extent of the hole in the Greek banking system is now apparent. We knew the banks needed more cash and suspected that they also needed new capital, which is the cash they must keep in their balance sheets to underpin their operations. Estimates last week were that €15 billion was needed. However figures of €25 billion were discussed at the euro group. It is not clear whether this will involve a “bail in” under which big depositors, holding over €100,000, would lose some of their money. The extraordinary damage done to the banks during the past couple of weeks when they were closed is now apparent. Before that, they were in trouble. Now they are in dire straits.
It remains to be seen to what extent the leaders can close the extraordinary gaps that appeared at the finance ministers' meeting and restore some sense of a common purpose. But, to use the old cliché, you can't put the genie back into the bottle. Today and the days ahead will tell a lot about whether Germany wants a euro zone dominated entirely by its view of the world, or is prepared to work with France and others to find a way forward.
First, the Greek crisis must be sorted – one way or the other. Even if there is agreement today by EU leaders, we face a rocky few days to see whether Greece is prepared to – and can – do what is being asked of it.
And if, in reply, the rest of the euro zone can agree to a deal and can get it through the national approval processes in enough countries to allow it to happen. How much does Greece want to stay in the euro? And how much does the rest of Europe want to keep it there? We are about to find out.